In any given year, if Amazon (NASDAQ:AMZN) delivered a 19% return, shareholders would probably be happy about the performance.
However, when the U.S. markets as a whole deliver a return 11 percentage points higher, it’s hard to feel anything but disappointed about the e-commerce company’s performance.
While you can’t always deliver record-setting returns, Amazon has delivered a five-year annualized total return of 43%. Expectations are set sky-high.
So, the question for investors is whether 2020 will be more of the same or the next leg up on its way to $2,000.
Expect More of the Same in 2020
As good as Amazon’s been the past decade, it failed to make the list of the 10 best-performing S&P 500 stocks of the past 10 years, finishing just outside the top 10 in 11th place. Jeff Bezos is unaccustomed to being on the outside looking in. That’s where shareholders find themselves heading into the next decade.
InvestorPlace’s Vince Martin recently discussed how cracks are beginning to show at Amazon that could hamper its performance in the months and years ahead. Martin points out that since Amazon hit its all-time high in August 2018, it has dropped 15%, suggesting the bloom has fallen off the rose.
He goes on to suggest the money Amazon is spending on its one-day shipping initiative, in part to stay ahead of Walmart (NYSE:WMT) and Target (NYSE:TGT), is hurting the company’s margins and profitability.
And the worst part is this could be the new normal for the e-commerce giant, putting an arbitrary ceiling on Amazon’s valuation. Over the past five years, the company has had a price-to-sales ratio of 3.24 and a price-to-cash-flow of 29.9.
Today, Amazon’s P/S and P/CF are 3.38 and 25.40, respectively. Impressive, but certainly not record highs. Investors are starting to become very selective about how much they pay to own a piece of the house that Bezos built. The big question is whether that will last.
In November, I wrote about the decision by Nike (NYSE:NKE) to stop selling its products on Amazon to focus on its direct-to-consumer business, which delivers higher customer engagement while reducing the sale of counterfeit Nike products. The move is bad news for Amazon because other large companies will follow suit.
Add into the mix increased competition at its AWS business, which delivers the lion’s share of Amazon’s profits, and you’ve got a problem that’s not quite a mountain but certainly bigger than a molehill.
All is not perfect at Amazon, and that’s reflected in its recently anemic stock price.
2019 Was Nothing But a Rest
Stocks do not go up in a straight line. Therefore, the 2019 slowdown could be Amazon’s shares taking a breather after a 15-year sprint.
Analysts remain very much in love with the company. It currently has 43 “buy” ratings, one “overweight” rating, two “holds,” no “underweight” or “sells,” and a 12-month price target of $2,178, 22% higher than today.
Cowen analyst John Blackledge recently named Amazon on his “best ideas” of 2020.
“AWS should enjoy years of secular tailwinds, driving (compound annual revenue growth) of about 27% as companies migrate their workloads to cloud computing,” Blackledge wrote in a note to clients.
Further catalysts for Amazon include Amazon Prime and its advertising business, which is beginning to look like a real winner, something I alluded to earlier this year when I suggested it could hit $10,000 sooner than expected.
When it comes to Amazon Prime, InvestorPlace’s Faisal Humayun projected that if the company continues to grow its subscription revenue by 30% annually, at the end of five years, those revenues will have grown to $68 billion, from $18.5 billion today.
If Amazon can leverage Prime outside the U.S., future profits will be tremendous.
The Verdict
As I stated in October, if the company continues to mistreat its warehouse workers, it won’t matter how fast it can get deliveries to customers. ESG investors will ensure Amazon gets put in the penalty box.
If you’re going to buy Amazon stock, keep this in mind because in the end, it won’t be any of its products or services that bring down the mighty e-commerce giant, it will be its inability to care about its workers.
In 2020, I hope it gets its act together because it’s the only thing I see holding Amazon back from $10,000.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
