Currently, Amazon (NASDAQ:AMZN) is stuck in a narrow trading range because the market is waiting on two things.
First, markets have doubts over the sustainability in the growth of Amazon Web Services (AWS). Despite the company posting strong revenue from AWS, markets are fretting over its recent loss over a Pentagon cloud deal to Microsoft (NASDAQ:MSFT). Second, the company is poised to jump ahead in the content streaming wars — just as it seems new players are entering the game.
With that in mind, let’s look deeper into why these two situations can be beneficial for Amazon heading into 2020.
Investments in AWS Will Pay Off
In the third quarter, Amazon faced higher operating costs in the AWS segment than the same period the previous year. However, these costs were due to higher sales and marketing spending. With its customer base broadening to more business sectors, Amazon needs more sales staff. Additionally, its capital leases or equipment leases line rose 30% — showing that the company is deliberately investing heavily in infrastructure to support the higher demand.
AWS adds thousands of new products and features annually, while also expanding globally. All of the market share growth requires more operating support to keep its customers satisfied.
In the near-term, Amazon’s Pentagon cloud deal loss will distract the company. In fact, the company is suing the government because it believes the evaluation process was deficient. LA Times reported that “Amazon will argue that its loss of the high-profile contract was due to improper political influence by President Trump.”
Pricing Pressure on AWS
Microsoft’s Azure is a competitive risk for AWS, and other cloud suppliers may sell their services at lower rates. Amazon is responding not only through lower prices, but by innovating its product.
At the AWS re:Invent conference this month, AWS CEO Andy Jassy said that the Amazon service brings in $36 billion in revenue — up 35% from last year. Additionally, the company’s cloud business represents nearly 48% of the global market for public cloud Infrastructure as a Service (IaaS).
Also at the conference, a number of new machine learning technologies were highlighted — including AWS DeepComposer. This product is described as “the world’s first musical keyboard combined with generative AI service,” and represents one example of how AWS capabilities are developing.
Amazon Building Momentum in Streaming Video
In the midst of the steaming services battle that is cutting cable cords nationwide, Amazon launched more than 20 new Fire TV products. By offering a sound bar, Fire TV Cube and other products for the home theater, the company seems to have everything a consumer would want.
However, the Fire TV product line has fierce competition. This past May, Fire TV had 34 million active users while Roku (NASDAQ:ROKU) had 29 million. With that being said, 2020 is a critical year for Amazon to widen its gap on the competition.
Furthermore, Amazon has developed original content and built apps like IMDb — and looking ahead, it will keep adding more over-the-top (OTT) offerings and expanding its content.
It is still early in this space, and therefore, Amazon has plenty of time to experiment with what works.
Seasonal Strength Ahead
With the holiday season beginning last month, Amazon always seems to reap the benefits of a fourth-quarter surge.
Overall sales for online retailers on Thanksgiving Day increased by 14.5% year-over-year to $4.2 billion, suggesting that Amazon’s online retail site will post strong numbers in its upcoming quarterly report. Also, low unemployment in the U.S. and a recent de-escalation in the U.S.-China trade war should lift consumer confidence.
Collectively, this could lead to holiday retail sales exceeding $1.1 trillion — which would be a 4.5%-5% increase.
Valuation and Your Takeaway
Currently, Amazon is trading at just under $1,800 per share. However, if the online retail giant grows revenue by at least 15% annually in the next five years, then the stock has a fair value of around $1,920.
So, Microsoft stock is soaring to new yearly highs and the Nasdaq is in an uptrend. Conversely, Amazon did not move by much in the last five months. But, that standstill will end as the company’s positive catalysts unlock and growth accelerates.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
