In a recent post for InvestorPlace.com, I described the main reasons why Amazon (NASDAQ:AMZN) stock should be a core holding for investors. The shares represent a great way to get exposure to some of the biggest trends in technology like AI (Artificial Intelligence), cloud computing, streaming and of course, ecommerce. Not many large companies can offer all that.
Yet all that does not imply that AMZN is a sure bet either. AMZN is certainly facing notable risks and issues. And besides, in the tech world, a top company can easily fall to pieces. Just look at Nokia (NYSE:NOK) and BlackBerry (NYSE:BB). They were once seemingly invincible. But they are now marginal players.
In other words, with AMZN stock, it’s a good idea to consider its potential downsides. So let’s take a look:
Today the cloud business should be dominated by a company like IBM (NYSE:IBM), Oracle (NYSE:ORCL) or Microsoft (NASDAQ:MSFT). But instead, the clear leader is AMZN. Amazon CEO Jeff Bezos had the vision to leverage his company’s e-commerce infrastructure into a thriving cloud unit. In fact, the cloud business was transformative for Amazon stock, as it offset the low margins of its e-commerce business and allowed it to invest in its other businesses.
But there is a problem: the cloud unit’s growth is slowing. For the most part, the competition is becoming much more of a factor for AMZN in this sector.
I’m not saying that AMZN ‘s cloud business will somehow fall apart. I believe the unit will remain solid.
Yet don’t expect it to continue to provide the necessary fuel to boost Amazon stock.
Leadership and Managerial Bandwidth
In a matter of only 25 years, Jeff Bezos has built a company worth close to $1 trillion. He was not only able to dominate high-growth markets but also find ways to deal with challenging environments, such as the dot-com bust (which almost led to the bankruptcy of AMZN). He was also masterful in convincing Wall Street that profits were not very important!
But during the past couple of years, there have been some nagging questions about Bezos’ leadership. First of all, he has been targeting a large number of market opportunities and many have not been successful (like the foray into smartphones). If anything, AMZN has become somewhat of a grab-bag of different businesses that really do not have much synergy.
Then there is Bezos’ personal situation. No doubt, his divorce was unexpected. What’s more, according to a recent Wall Street Journal profile, Bezos has been focusing much more of his time on AMZN’s Hollywood image (the title of the piece was “Jeff Bezos’ Journey From Private Family Man to Tabloid Sensation”). He is also devoting more time to pursuits outside the company, like his space venture.
The Limits of AMZN’s Growth
Even with over $240 billion in revenues, AMZN continues to crank up the growth. Note that last quarter, its revenue jumped 20% year-over-year.
But keeping that level of growth up will get harder and harder. It will also mean moving into categories in which AMZN may have fewer advantages.
An example is healthcare. The company has been investing heavily in this business, with internal development and acquisitions. But so far, the results have been mixed. For example, AMZN’s PillPack division – which is a digital provider of prescriptions – recently was accused by health information network Surescripts of fraud. True, AMZN has denied any wrongdoing. But this episode shows that it can be extremely difficult to disrupt highly regulated markets that have entrenched players.
Interestingly enough, as AMZN gets larger, the company becomes a bigger target of antitrust regulators. Already it appears that AMZN is a target of a Department of Justice probe, which could ultimately lead to heavy fines or even the breakup of the company.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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