I’m normally largely bullish on big tech stocks, with the underlying theme being that these stocks represent the cream of the crop in the world’s increasingly most important and valuable industry. But, one big tech stock which I haven’t been bullish on recently — and which I remain cautious of — is eCommerce and cloud giant Amazon (NASDAQ:AMZN). Amazon stock concerns me.
This might come as a surprise to you. After all, Amazon is often heralded as the face of big tech, with one of the most recognizable brand names in the world, and a rich history of operational innovation, huge revenue and profit growth, and massive share price gains. But, over the past few months, both Amazon and AMZN stock haven’t been acting like themselves.
Specifically, competition is finally catching up to Amazon on both the eCommerce and cloud fronts. This elevated competition has weighed on the company’s growth rates and margins. As the growth trajectory has flattened out, AMZN stock has gone nowhere.
About 16 months ago, this was a $1,750 stock. Today, Amazon stock trades hands at $1,750, too.
The unfortunate reality here is that the competition headwind is only going to get worse in the near-term. As it does, growth rates will continue to moderate, and AMZN stock will remain weak.
The implication? Be wary of AMZN stock for the time being.
Competition Is Killing Amazon
In a nutshell, competition is killing the Amazon growth narrative.
Amazon jumped out to an early lead in both the eCommerce and cloud infrastructure markets by being the first-to-market and leveraging first mover’s advantage and platform/network effects to sustain market leadership. But over the past few quarters, Amazon’s competition on both the eCommerce and cloud fronts has stepped up in a big way. As it has, Amazon has ceded market share, the company’s growth rates have tumbled, and AMZN stock has struggled.
Specifically, Walmart (NYSE:WMT), Target (NYSE:TGT), Costco (NASDAQ:COST), and various other large traditional retailers have leveraged their existing resources (cash on hand, cash flows, infrastructure, experiences, etc) to develop robust e-commerce and omnichannel commerce platforms over the past few quarters.
Meanwhile, on the cloud front, Microsoft (NASDAQ:MSFT) recently won a highly publicized Pentagon cloud contract — beating out Amazon in a move that underscores that Amazon’s dominance in cloud is fading.
Net net, Amazon is losing market share in both the eCommerce and cloud markets, thanks to rising competition. Consequently, growth rates are falling. So are margins, since Amazon is relying on promotional activity and deeper discounts (think one-day-shipping) reinvigorate revenue growth.
Amazon Stock Will Remain Weak
Because of falling growth rates and compressing margins, AMZN stock hasn’t gone anywhere in 16 months. For those same reasons, shares won’t go anywhere anytime soon, either.
On the eCommerce front, it appears that the likes of Walmart and Target are only gaining momentum. Both of those companies are firing off decade-best traffic and comparable sales growth numbers, while their e-commerce businesses are growing at steady 20%-plus clips. So long as these companies maintain this momentum, that’s bad news for Amazon.
Meanwhile, Microsoft just won the Pentagon contract, and the impacts of this “win” will be felt for the next few quarters. Why? Because other enterprises will see that Microsoft beat out Amazon in arguably the most important cloud contract ever. Some will see it as a validation of Microsoft being better than Amazon in cloud.
Of those who do, some will feel compelled to either choose Azure over Amazon Web Services, or actually switch from AWS to Azure. Either way, Amazon’s cloud growth trajectory suffers.
With respect to margins, Amazon has a history of taking hits on profitability in order to grow. This time will be no different. Amazon will do everything it can to maintain market dominance and keep the revenue growth narrative on track. Thus, margins aren’t safe for the foreseeable future.
Big picture: Amazon’s revenue growth rates and margins will keep falling. As they do, AMZN stock will remain weak.
Bottom Line on Amazon Stock
Amazon is a long term winner. But, all long term winners go through bouts of near to medium term volatility. That’s exactly where AMZN stock is today, and unfortunately for bulls, it looks like the tough times won’t end anytime soon.
As of this writing, Luke Lango was long WMT, TGT, and MSFT.
