Once the poster child for hyper-growth momentum stocks, internet giant Amazon (NASDAQ:AMZN) has lost some of its shine over the past year. That is, Amazon once held huge leads in the e-commerce and cloud markets. Those leads have shrunk considerably. As they have, Amazon’s growth trajectory has meaningfully decelerated.
For all intents and purposes, Amazon is a growth stock. Consequently, as Amazon’s growth trajectory has decelerated, AMZN stock has fallen flat. In the twenty months leading into June 2018, Amazon stock essentially doubled (while the S&P 500 rose about 25%, so huge out-performance). In the twenty months since June 2018, AMZN stock has risen just 13% (while the S&P 500 has risen 22%, so noticeable under-performance).
This under-performance in Amazon stock will persist for the foreseeable future, and for the same reasons that shares have under-performed over the past twenty months.
Competitive pressures in the e-commerce and cloud markets will only grow in 2020. As they do, Amazon’s revenue growth rates will come down, margins will come under fire, and the profit growth trajectory will slow. At 70-times forward earnings for ~20% revenue growth, Amazon stock is not priced for these headwinds.
Consequently, while I think 2020 can and will be a good year for a lot of growth stocks, I don’t think it will be a good year for Amazon stock.
Competitive Pressures are Building
My relative bearishness on Amazon stock hovers around this idea that Amazon is relinquishing early leads in its core markets, and rising competitive pressures in 2020 will only accelerate this broad market share erosion.
First, we have the e-commerce market, where Amazon jumped out to an early lead in the 2010s by being the first to create a fully fleshed-out e-commerce platform with low prices and fast delivery times. But Walmart (NYSE:WMT) and Target (NYSE:TGT) have finally caught up to Amazon. They both have huge e-commerce platforms now, with low prices and comparably fast delivery times to Amazon. That’s why Walmart and Target’s growth trajectories have materially improved over the past few years, while Amazon’s has slowed.
This dynamic won’t get better anytime soon. Bulls are hoping that free one-day shipping for Prime customers will right the ship. It won’t. Walmart and Target are already experimenting with free one-day shipping, too, and they have advantages in delivering that promise because of their already-huge physical store footprints (90% of the U.S. population is within 10 miles of a Walmart store, and it doesn’t take one day to drive 10 miles).
As such, competitive pressures in the e-commerce market won’t relent anytime soon. Anything Amazon does, Walmart and Target will do, too.
Second, we have the public cloud market, where Amazon Web Services has long been the unchallenged king. But, over the past few years, Microsoft’s Azure service has steadily gained share on AWS. This culminated in late 2019, when Azure beat AWS for the Pentagon’s ultra-valuable and highly-coveted cloud contract. An Azure victory there represents a tipping point in the public cloud market, where Microsoft is on a visible pathway to becoming the new king.
In 2020, the dynamic of Microsoft gaining cloud market share and Amazon losing it, will only accelerate.
Amazon Stock Is not Cheap
Amazon stock isn’t cheap enough considering that the company’s competitive pressures are building. As such, shares may tread water for the next few months.
Amazon trades at 70-times forward earnings. That’s a huge forward earnings multiple. Revenues are growing at roughly 20% year-over-year. That’s a big revenue growth rate, but not a huge one. Clearly, the 70-times forward earnings multiple prices in two things: One, Amazon sustaining 20% revenue growth for several years to come. Two, Amazon’s profit margins expanding significantly over the next few years.
Those two things may not happen.
The more competition Walmart and Target provide in e-commerce, the slower Amazon’s e-commerce business will grow. At the same time, the more Amazon tries to differentiate itself from e-commerce competition through promotions and faster delivery, the lower Amazon’s margins will go, because those things require expenses. So, if you look at Amazon’s e-commerce business, the most likely path forward is slower growth and lower margins.
The cloud outlook isn’t all that great, either. Increasing Azure competition will couple with easing cloud adoption tailwinds, and AWS will likely report slower revenue growth rates over time. Margins may not go much higher, either, because stiffer competition implies lower pricing power.
The one thing that could save Amazon is digital advertising business ramp. But even super growth there might not be enough to offset revenue and margin headwinds in both the e-commerce and cloud businesses.
Consequently, I see Amazon going forward as a company with slowing revenue growth rates and margin pressures. At 70-times forward earnings, AMZN stock isn’t priced for this.
Bottom Line on AMZN Stock
Amazon is a great company that will remain a leader in many of tomorrow’s most important markets. Because of this reality, Amazon stock won’t fall off a cliff anytime soon. This is simply too good of a company to do that.
At the same time, Amazon is also coming under intense and escalating competitive pressures, and the stock isn’t priced for these pressures to keep building. They will, and as such, AMZN stock may not charge much higher anytime soon. This is simply too expensive of a stock, with too much priced in, to rally if the growth trajectory continues to flatten out.
As such, I’m sitting on the sidelines for this one. Downside risk seems limited. So does upside potential. Sideways is the most likely path forward here, and that’s not too exciting.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
