2018 was a trying year for e-commerce giant Amazon.com Inc. (NADSAQ:AMZN). Over the past six months, Amazon stock suffered as overall market malaise coupled with a worse-than-expected quarterly performance bought the stock down from its August highs above $2,000 per share.
A big part of the reason for this drawback concerns whether AMZN is starting to slide off of its pedestal at the top of the e-commerce industry. The firm’s January 31st earnings showed that growth was subdued and caused many to question whether or not Amazon can continue to produce the kind of returns they’ve become accustomed to.
Amazon’s Prime Ecosystem
One of the major reasons investors love Amazon is the fact that the company offers an ecosystem that its customers become reliant on. The firm’s Prime membership has made Amazon a popular choice for online shoppers. Members tend to buy everything through Amazon regardless of price in order to make use of the free expedited shipping that their membership offers.
That ecosystem is huge for AMZN stock investors because it brings in a huge percentage of Amazon’s overall revenue. First, there are the membership fees themselves, which make up about 5% of the company’s revenue. Then there’s the revenue that Amazon gets from its retail products, which accounts of the bulk of the firm’s revenue (about 70%).
More importantly, though, is the fact that the Prime ecosystem is a big part of Amazon’s future growth plans. Many online shoppers turn first to Amazon when researching their purchases. That’s huge for merchants because once people have made a decision about what to buy, they’re already on a platform that allows for an easy sale conversion. For that reason, many are expecting to see Amazon’s advertising business grow substantially over the next few years.
EMarketer says it sees Amazon earning 8.8% of ad spending dollars in the U.S. this year- that’s two percentage points from where the firm stands today. Right now, Amazon’s advertising revenue is grouped in its “Other” revenue category, which makes up just 2% of the firm’s overall revenue. However, as advertising dollars are increasingly spent on Amazon, that figure will likely grow.
Prime Linked to Future Growth
On the surface, that looks like the company is starting to diversify away from relying so heavily on Prime to attract and hold on to customers. However, without loyal Prime members, Amazon’s advertising business would be nothing. The two are closely linked.
The problem investors see is the fact that the biggest draw for Prime members is expedited shipping. The firm was one of the only places you could get free two-day shipping on virtually every purchase, but that competitive advantage is slowly starting to fade as competitors like Walmart (NYSE:WMT) beef up their own shipping offerings. Amazon could suffer if free expedited shipping becomes the norm for other big name e-retailers because although Prime members gain access to other benefits like video and music streaming, it’s shipping that creates the most buzz.
A loss of Prime customers translates to a loss of eyeballs on the Amazon platform, which could negatively impact the company’s advertising growth plans.
Taking on the Competition
So, can Amazon hold on to its position as top dog in the e-commerce space as its shipping advantages wane? I think so. First of all, the firm has been investing heavily in its other prime membership benefits which should help offset competition from companies like Walmart who are aiming to replicate Amazon’s shipping policies.
Plus, AMZN stock could benefit from a shift in consumer behavior toward more eco-friendly purchases. This week Amazon announced that it hopes to reduce its carbon footprint significantly by 2030. The company says it aims to make half of its shipments carbon neutral over the next decade — a move that will be praised by climate change advocates.
Not only is Amazon’s latest goal a socially responsible decision, but it should help the company rework its shipping policies in a way that will set the firm apart from competitors. Prime members’ two-day shipping perks are costing Amazon and the environment, because it requires the firm to send out more individual deliveries. However, AMZN may be able to create a new system in which the trips from Amazon’s warehouses to customers’ front doors can be consolidated.
Amazon is planning to disclose its carbon footprint this year, a decision that only a few other e-commerce companies have been willing to do. But once Amazon starts revealing its carbon footprint data and working to reduce it, the firm’s competitors will be under pressure to do the same. If Amazon is able to position itself as being both convenient and environmentally responsible, the firm could hold onto its view from the top even as competitors improve their own shipping offerings.
The Bottom Line for Amazon Stock
There’s no doubt that Amazon stock is under a lot more pressure now than it was a few years ago. The retail industry has accepted e-commerce as the new normal and adjusted accordingly.
However, I don’t think you’ll see a Prime mass exodus anytime soon. Not only do I believe in Amazon’s efforts to beef up its Prime offerings, but I think the firm’s decision to focus on improving its carbon footprint will be beneficial to customer loyalty.
As of this writing, Laura Hoy was long AMZN.
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