Amazon (NASDAQ:AMZN) and “rebound” don’t often go together in the same breath. But with just a couple of weeks left in 2019, shares are up just 19%, meaning the stock is likely to lag both the S&P 500 and the Nasdaq Composite indexes, two benchmarks in which the e-commerce giant is one of the largest components.
Another surprise regarding Amazon stock, a name investors often associate with leadership not laggard status, is that it’s in an unusually unhealthy technical position as it hasn’t closed above its 200-day moving average in over a month.
Much of the recent lethargy in Amazon stock is attributable to the cloud. Amazon Web Services, although fast-growing by any reasonable metric, isn’t growing at the same rapid rate as the rival Azure cloud offering from Microsoft (NASDAQ:MSFT). In a vacuum, the recently reported year-over-year revenue growth of 35% reported by AWS is stellar. But it lags the 59% posted by Azure.
Then you have the Pentagon’s recent decision to award a $10 billion contract to Azure. That has been problematic for Amazon stock, but the company hasn’t done itself any favors by not going quietly into the night. It’s fighting the decision in the courts where there are simply no guarantees that things break in the company’s favor.
Still Prepared for Growth
Amazon maintains dominant positioning in the infrastructure-as-a-service market. At the end of last year, it had nearly 48% market share. That’s more than double the combined percentage of that market of Microsoft and Alibaba (NYSE:BABA).
Amazon’s cloud dominance is cemented in part by switching costs. It’s costly and time-intensive for corporate users to switch cloud platforms, and any cost benefits that can be realized can easily be diminished by lost time during the switch.
What is clear is that many corporate IT professionals view the infrastructure-as-a-service race as having two horses: Amazon and Microsoft. These professionals view the former as dominant and the latter as growing. Of course, there’s much more to the company’s business model and the Amazon stock thesis beyond the cloud.
Logistics is becoming increasingly important to Amazon, which is a way of saying the company is relying less on the U.S. Postal Service, FedEx (NYSE:FDX) and UPS (NYSE:UPS). Amazon has gone from delivering just 20% of its own packages to about half in the span of just a year.
In its most recently completed quarter, Amazon spent $9.6 billion on fulfillment, underscoring the point that the company takes this element of its business seriously. And in the future, it’s less likely to depend on FedEx and UPS to get packages to customers.
“With 2017 shipping costs that exceeded $21 billion, the company was working to establish greater control over its supply chain network and capabilities,” according to Harvard University’s P. Fraser Johnson and Ken Mark.
Bottom Line on AMZN Stock
As noted above, AMZN stock has some lofty standards to live up to, making 2019 an undisputed disappointment. However, the company has a well-documented history of bouncing back from off years. Those points don’t address Amazon’s growing network effect.
“Amazon also benefits from a network effect, as low prices, an expansive breadth of products, and a user-friendly interface attract millions of customers, which in return attract merchants of all kinds to Amazon.com, including third-party sellers on Amazon’s Marketplace platform (which represented more than 50% of total units sold in 2018) and wholesalers/manufacturers selling directly to Amazon,” notes Morningstar.
The bottom line is that you shouldn’t bet on Amazon stock being a laggard again in 2020. If the economy remains strong, bet on a big rebound.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.