Amazon Stock Has a Cold, But Catching the Flu is Unlikely

Here’s a situation that investors don’t hear about every day: the major U.S. equity benchmarks have recently been ascending to record heights, and they are doing so with no assistance from Amazon (NASDAQ:AMZN).

Growth-Related Margin Compression Concerns Keeping Amazon Stock Sideways

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That is notable for myriad reasons, not the least of which is the fact that Amazon stock is the third-largest component of the SPDR S&P 500 ETF (NYSEARCA:SPY) and other S&P 500 ETFs. Since reaching a 52-week high on July 15, Amazon stock has fallen about 14%. But over that period, the Nasdaq-100 Index, of which Amazon is a marquee member, has  climbed 5.1%, while the S&P 500 has risen 3.9%.

Making recent developments all the more painful for Amazon stock is that over that period,  Walmart (NYSE:WMT) is up 3.6%. In 2019, sleepy old Walmart is trouncing Amazon by about 12 percentage points.

During that time period,  Uncle Sam awarded a $10 billion cloud contract to Amazon’s rival, Microsoft (NASDAQ:MSFT), cementing the latter’s fast-growing Azure unit as a credible threat to Amazon’s cloud unit, Amazon Web Services (AWS). Chastened by that defeat, Amazon is appealing the verdict, but this is a waste of time.

Since that contract was awarded late last month, there has been speculation that President Donald Trump interfered in the process to ensure Amazon didn’t get the deal. Assuming that’s true, it can be seen as petty, if not spiteful behavior. However, Amazon should have seen the loss of the contract coming. CEO Jeff Bezos owns The Washington Post, a publication that, to put things delicately, isn’t liked by the president and doesn’t do a good job of masking its political leanings.

Companies are free to have political leanings. It’s not a stretch to say that Apple (NASDAQ:AAPL) leans left, but CEO Tim Cook at least has committed to having a dialogue with President Trump, and he doesn’t own a major media property that ruffles the president’s feathers. Bezos does own such an asset and, although the Washington Post isn’t a unit of Amazon, it most likely creates guilt by association in Trump’s eyes.

Putting Politics Aside…

Moving past politics, there are still many reasons to consider Amazon stock even amid its current weakness.  Some investors may be wondering just how much more Amazon, with its market capitalization of more than $862 billion, can grow. The answer is a lot.

“Key top-line metrics–including active users (a 12% compound annual growth rate the past five years), total physical and digital units sold (23% CAGR), and third-party units sold (30% CAGR)–continue to outpace global e-commerce trends, suggesting that Amazon is gaining share while fortifying its network effect,” said Morningstar in a recent note.

While Bezos’ politics may be eagerly debated by some, his leadership style has benefited the customers and the owners of Amazon stock, as some researchers have noted.

The executive members of Amazon hold their employees to the highest standards possible,” according to a University of New Hampshire study of the company. “The employees at Amazon have the mindset of being the best, and Bezos expects his employees to be the best they can be. The Insist on the Highest Standards principle ensures that all employees are constantly raising the bar and demanding the best ideas, products, and services possible. When Amazon employees are creating new products, they do not stop at a mediocre product.”

In fact, Amazon’s organizational structure is widely cited as reasons for the company’s success. Structure is integral because the company is sprawling, has its hands in various businesses beyond e-commerce and employs more than 600,000 people around the world.

The Bottom Line: Rare Dips by Amazon Stock

There are some near-term risks facing Amazon stock. Namely, its weakening technical health could trigger downward price-target revisions by analysts. The current consensus target on the name is $2,183, but Amazon stock closed around $1,739 on Friday, Nov. 15.

Conversely, the history of Amazon stock confirms that dips, including those of the current one’s magnitude, usually give way to gains, not lengthy periods of underperformance or bear markets. Taking a longer view of things, Amazon’s mastery of operational efficiency is a significant catalyst for investors to consider.

“One of Amazon’s key advantages is its operational efficiency of its fulfillment and distribution network, which satisfies consumer demand for free and expedited shipping (including plans to expand one-day delivery for U.S. Prime members during 2019),” according to Morningstar. “This allows Amazon to generate strong cash flow, which in turn can be reinvested in advertising, customer service, and website enhancements that keep its marketplace robust and customer loyalty strong.”

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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