There are a lot of Amazon (NASDAQ:AMZN) bulls out there. Specifically, according to TipRanks, 38 of the 39 analysts who cover the company have a “Buy” rating on the stock. No analyst has a “Sell” rating.
Yet, over the past 18 months while the broader indices have surged to all-time highs, Amazon has gone nowhere. That is, since mid-June 2018, the stock is up just 4%. The S&P 500 is up around 15% over that same stretch, while the Nasdaq 100 is up almost 20%. Both of those indices presently trade at all-time highs. Amazon, meanwhile, trades more than 10% off its all-time highs.
In other words, despite the overwhelming bullishness on the stock, shares have significantly under-performed over the past year and a half.
Why? Competition. Long story short, Amazon jumped out to an early lead in e-commerce and cloud infrastructure services. Over the past year and half, competitors have caught up to them, with Walmart (NYSE:WMT), Target (NYSE:TGT) and Costco (NASDAQ:COST) gaining huge ground in e-commerce, and Microsoft (NASDAQ:MSFT) stealing momentum in the cloud market.
Growth has slowed, margins have been hit and shares have struggled. More importantly, how much longer will this competition headwind persist? For a little while, but not forever.
Overall, while I think Amazon has significant long-term upside potential, I also don’t think shares will start realizing that upside potential anytime soon. Instead, for the next few months, competition headwinds will continue to weigh on shares. And until those headwinds clear up, I’d steer clear of buying into this prolonged weakness in the stock.
Competition is Hurting Amazon
In a nutshell, Amazon hasn’t gone anywhere over the past year and a half because competitors have caught up to them.
On the e-commerce front, the likes of Walmart, Target, Costco and others have built out fully developed e-commerce platforms with super fast delivery networks and numerous omnichannel capabilities. In doing so, they’ve evened the playing field in the e-commerce world. Now, as consumers are pivoting from physical to digital commerce, they are pivoting not just to Amazon.com, but also to Walmart.com, Target.com, etc. This democratization of the e-commerce world has naturally led to a slowdown in Amazon’s e-commerce business.
Additionally, it has hurt margins. Amazon is trying to regain its competitive advantage over peers by making one-day shipping free. That’s a huge investment, and it’s weighing big on margins; However, it’s not paying off … yet.
So, in the meantime, the company’s e-commerce revenue growth rates are slowing and margins are dipping. That’s an unfavorable combination.
At the same time, Microsoft has caught up to Amazon in the cloud infrastructure market. For years, Amazon has been king in this market, and Microsoft has been a solid second fiddle. But, the game-changing moment came when Microsoft beat out Amazon for the Pentagon’s big cloud contract. Since then, Microsoft has announced a series of cloud contract wins, and appears well positioned to dethrone Amazon as the king of this market.
Consequently, Amazon’s cloud revenue growth rates are slowing — and will likely keep slowing — while margins may come under pressure as competition heats up.
Big picture, revenue growth is slowing and margin pressures are building at the company because the competition has finally caught up in e-commerce and cloud.
Amazon Will Bounce Back… Eventually
Long term, Amazon will bounce out of this prolonged era of weakness.
This is simply a byproduct of the fact that the company is still the most important player in the secular growth e-commerce and cloud markets, and an increasingly important player in the secular growth digital advertising and streaming TV worlds. Its strong, competitive positioning in those markets will drive big revenue and profit growth over the long run, the sum of which will drive Amazon higher.
But, because Amazon is so richly valued at nearly 90-times forward earnings according to Seeking Alpha, this company needs to fire on all cylinders in order for shares to move higher in the near term.
Right now, though, the company isn’t doing that — and it won’t anytime soon, either. Walmart and Target are only gaining momentum, and it will take at least a few quarters until free, one-day shipping yields meaningful revenue benefits. At the same time, Microsoft’s Pentagon cloud contract win is still fresh, and will likely propel a bunch of Microsoft cloud signings in the early parts of 2020. These contract wins for Microsoft are contract losses for Amazon, and big tech probes and regulation fears will also stick around.
Thus, for the next few months at least, Amazon’s business will remain under intense competitive pressures. So long as that remains true, the stock will struggle to head higher.
Bottom Line on Amazon
Amazon is a great company, and secular tailwinds in e-commerce, cloud, digital advertising and streaming will propel the company meaningfully higher in the long run.
But, competitive pressures have weighed on Amazon for the past 18 months. Those competitive pressures won’t ease anytime soon, and until they do, shares will likely be stuck in neutral.
As of this writing, Luke Lango was long WMT and MSFT.
