Amazon (NASDAQ:AMZN) didn’t have its best year ever in 2019. The 23% increase in value for AMZN stock wasn’t terrible by most measures, but it didn’t come close to the sort of gains other tech giants saw. For example, Apple (NASDAQ:AAPL) — despite continued softening demand for the iPhone, its most important product — saw its stock grow in value by 85% on the year. Amazon stock lagged the broader markets as well. There is a good case to be made that 2020 could be a turnaround year for the company. However, there are also a number of risk factors in play that could prevent Amazon investors from celebrating in 2020.
Of all of Amazon’s business units, the most critical to the company’s bottom line is Amazon Web Services (AWS). In the company’s last quarter, AWS accounted for just 13% of revenue, but the $2.26 billion in operating income for the division represented nearly 71% of Amazon’s profits. AWS revenue growth slowed in Q3 (analysts had been expecting that $2.26 billion would actually be $2.55 billion). That news was a big part of the 8% drop AMZN stock suffered after those Q3 earnings were announced.
Amazon also took a hit in 2019 when AWS lost its bid for a high profile — and high value — contract to competitor Microsoft (NASDAQ:MSFT). In October, it was confirmed that the Department of Defense had chosen Microsoft Azure over AWS for its $10 billion JEDI cloud computing contract.
AWS is the engine driving Amazon profits, and if the cloud computing division stumbles further in 2020, it won’t be good news for those hoping to see bigger growth in that Amazon stock price.
While AWS is the key to Amazon’s profits, e-commerce remains the company’s revenue generator and the public face of Amazon.
Amazon.com faces stronger competition than ever. Traditional brick and mortar retailers like Walmart (NYSE:WMT) have seriously upped their online shopping game. This includes challenging Amazon in one of its strong suits: free shipping. Those efforts to fight back are paying off. In November, Walmart reported that its Q3 e-commerce revenue had grown 41% over the previous year. No-one is expecting Walmart, or other big retailers like Target (NYSE:TGT) and Best Buy (NYSE:BBY) to ease off this year in their efforts to win shoppers back from Amazon.
In addition to the pressure from traditional retailers, Amazon is facing increased competition against its marketplace sellers. In a 2018 letter to shareholders, the company noted that since 2017, third party marketplace vendors had been selling more products on Amazon.com than Amazon itself. The small-to-medium sized businesses that make up the marketplace are increasingly tempted by alternatives like Shopify (NYSE:SHOP). During the high point of the 2019 holiday shopping season — Black Friday and Cyber Monday — globally, Shopify vendors sold $2.9 billion worth of merchandise, for a 61% increase over the previous year. That kind of success could lure third party merchants away from the Amazon marketplace.
One of the biggest threats Amazon faces in 2020 is a result of its success: government regulation. Amazon is in the crosshairs of Democratic Presidential candidate Elizabeth Warren’s proposed plan to break up big tech companies. There has already been talk about the possibility of spinning off AWS — Amazon’s profit center — as a result of regulatory pressure from the U.S. and European governments. The company is also under increased government scrutiny for issues ranging from worker safety, to the volume of packages impacting the USPS, to a growing number of deaths on the roads attributed to Amazon’s own delivery drivers.
Will AMZN stock have the turnaround year in 2020 that investors are hoping for? If there’s anything we’ve learned over the past several decades, it’s to never count Amazon out. That being said, there are obstacles to overcome if that Amazon stock price is going to beat its 23% growth for 2019.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.