Amazon (NASDAQ:AMZN) stock is up 16% in 2019.
Source: Sundry Photography / Shutterstock.com
In most years, that would be excellent news.
However, in 2019 Amazon stock is trailing the U.S. market by almost 10 percentage points. The S&P 500 is having its second-best year since 2004. Yet the Amazon stock price has had a hard time keeping up.
Amazon is losing momentum at absolutely the wrong time of the year. Last year, 164 million Americans did some holiday shopping in the five days between Thanksgiving and Cyber Monday. Look for that number to increase this holiday season.
A bunch of arguments can be made about why AMZN stock is sputtering heading into the Super Bowl of shopping. Here are two that I believe have a lot of traction.
After just two years on Amazon, Nike (NYSE:NKE) announced on Nov. 15 that it’s ending its pilot program of selling its shoes on the e-commerce giant’s website. Nike explained that it wants to focus on its direct-to-consumer (DTC) business, which brought in almost $12 billion in its latest fiscal year, accounting for 30% of its annual sales.
The whole reason Nike joined up with Amazon was to control third-party sellers’ ability to sell counterfeit Nike products. However, it ultimately could not do much to stop these sales, and its rank in Amazon’s marketplace actually dropped.
By creating more “direct, personal relationships” with its customers, Nike feels it can grow faster. Former AOL CEO Tim Armstrong believes the company’s DTC business is ready to take off, and that’s horrible news for Jeff Bezos and company. Armstrong’s latest business invests in brands that sell directly to customers.
Analysts, too, believe that DTC is the future of retail.
“The move shows us that strong brands realize that traffic driven to their own site (e.g. NIKE.com) is self-sustaining, more profitable, and actually brand enhancing, while traffic and incremental revenue from Amazon.com is less profitable but also less brand enhancing,” Jefferies analyst Randy Konik stated recently.
Look for more large companies to abandon Amazon.
AWS Is Losing Its Dominance
Anyone who follows Amazon knows that Amazon Web Services (AWS, the company’s cloud business,) is the goose that laid the golden egg. In the third quarter, AWS generated 11.8% of its sales and a whopping 55.8% of its operating income.
AWS has transformed Amazon from a company that’s barely profitable to one that’s meaningfully profitable. AWS is the lifeblood of the company.
Microsoft recently won a major contract from the Department of Defense, beating Amazon for the deal. Called JEDI or Joint Enterprise Defense Infrastructure, the contract is expected to be worth as much as $10 billion over the next decade.
For a company as large as Microsoft, it’s not the $10 billion that matters, but the fact that the U.S. government believes MSFT’s cloud business can keep up with that of Amazon. That endorsement will help MSFT CEO Satya Nadella for years to come.
Considering that Alphabet (NASDAQ:GOOGL), IBM (NYSE:IBM), and even Salesforce (NYSE:CRM) and Alibaba (NYSE:BABA) are also competing with AWS, the goose’s ability to lay more golden eggs is getting harder by the day.
The Bottom Line on AMZN Stock
As long as Jeff Bezos continues to treat some of the company’s employees questionably, there are always going to be investors who will pass on owning Amazon stock.
For most of those who care less about environmental, social and governance, owning AMZN stock still makes sense.
However, as we head into the make-or-break Thanksgiving weekend, I’d expect Amazon to launch some new initiatives as retailers such as Target (NYSE:TGT) and Walmart (NYSE:WMT) continue to grow their online businesses. AMZN will still do well, but it no longer has the field all to itself.
Whether you’re an actual investor or considering making a bet on Amazon stock, the one thing you should expect in 2020 is a lot more volatility from AMZN.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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