It hardly seems like things are that bad for Amazon.com (NASDAQ:AMZN) at the moment. Shares rose 23% in 2019 and showed strength at year-end. Profits are likely to be roughly flat, but Wall Street expects that to change: consensus estimates project $27 in earnings per share in 2020, up 30% year-over-year. Revenue growth, meanwhile, continues to impress. The top line should grow nearly 20% this year, a huge achievement given the 2018 base of $233 billion in sales.
But looking closer, concerns lurk. One-day shipping has created billions of dollars in added expense and has pressured the stock since it was announced this summer. Competition is increasing both for the retail business and Amazon Web Services. Even 2019’s performance wasn’t all that impressive relative to tech stocks more broadly: the NASDAQ Composite increased 35% last year.
In that context, the year-end strength in the stock looks like it might reverse. That’s particularly true given that a big one-day spike last week made little sense. From a broad standpoint, I still have faith in Amazon. I’ve argued in the past that it should be the world’s most valuable company. But the concerns heading into 2020 are real, and I expect them to weigh on the stock, at least in the early going.
An Odd Spike
On Dec. 26, Amazon saw a big bounce, with shares rising over 4%. The catalyst appears to be a press release which highlighted broad strength during the holiday season.
To be sure, there’s quite a bit of good news in the release. Amazon noted that over five million consumers had begun free trials or paid memberships of Amazon Prime. Echo sales appear solid. Unit sales worldwide for third-party sellers rose at a double-digit rate.
All that said, there was nothing in the release that suggests a change in expectations for 2020. Double-digit growth in Amazon Marketplace is not a surprise; rather, it’s the multi-year status quo. Echo hardware has been a winner for Amazon, which clearly has surpassed Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) in the smart device market. But those devices likely don’t move the needle against a market capitalization that still exceeds $900 billion.
Meanwhile, as Barron’s noted, the 2019 release doesn’t sound much different from those of previous years. In fact, in 2018, Amazon said “tens of millions” of new Prime customers had been acquired. Barron’s called the 4% rise a “$50 billion miracle,” and that description doesn’t sound far off. In fact, shares now have given back over a quarter of that rise.
What Comes Next
Following the late December move, it’s hard to see what drives more upside shares in the early going of this year. Amazon still has two full quarters before it laps the higher spending backing one-day shipping — and is likely to post year-over-year profit declines in both quarters. The fourth quarter release looms at the end of the month, and the last two quarters have disappointed on the bottom line.
As I wrote in November, this is a stock, and even a company, that for years simply looked bulletproof. Amazon has failed in certain initiatives, but when it’s succeeded, it’s won big, most notably with the Amazon Web Services cloud business. It’s run over most brick-and-mortar retail competitors. Amazon has built out a logistics business that rivals, and maybe surpasses, those of FedEx (NYSE:FDX) and United Parcel Services (NYSE:UPS).
But over 2019, that sense faded. Amazon hasn’t won in media; the “streaming wars” feature Netflix (NASDAQ:NFLX), Disney (NYSE:DIS), and AT&T (NYSE:T). Every tech titan is gunning for AWS, and Microsoft (NASDAQ:MSFT) clearly is taking share. Walmart (NYSE:WMT) and Target (NYSE:TGT) have figured out how to leverage their vast store bases to compete on the retail front.
For years now, investors have been willing to pay an enormous multiple to own a piece of Amazon, given its vast reach and enormous growth potential. That willingness may not be there, at least in the first half.
The Bull Case
To be sure, none of this is to say that Amazon is a short target. The opportunity remains enormous. As noted above, growth continues to be impressive.
But a 68-times forward price-earnings multiple incorporates a lot of the good news. And investors can’t ignore the fact that shares badly underperformed in the second half of the year.
At the least, I’d expect a “wait and see” attitude toward one-day shipping. Combined with somewhat inexplicable late December strength, that suggests underperformance should continue, and makes Amazon a second-half 2020 play at the earliest.
As of this writing, Vince Martin has no positions in any securities mentioned.
