The gods of fate have been kind to Amazon. In contrast to much of the general stock market, Amazon’s stock price has weathered the initial phase of the market downturn extraordinarily well. In fact, Amazon has recently powered to a new high after announcing the hiring of 175K new employees to keep up with delivery demand.
With the world shut down and locked in their homes, Amazon is perfectly positioned with its unparalleled online shopping options and home delivery to service new customers looking for a way to buy necessities and entertainment from the comfort and safety of their own homes.
In this article, I’ll explore 4 reasons why I think Amazon will enter 2021 more dominant than ever.
- Whole Foods and Amazon Go
- Prime memberships
- Final thoughts
Amazon acquired Whole Foods in 2017 for $13.7 billion.
Even though the food retail business is huge — about 5.75 trillion U.S. dollars in 2017 — at the time of the acquisition, I think a lot of analysts and financial writers were justifiably confused. Grocery just didn’t seem like the kind of explosive growth business Amazon is famous for investing in.
Encouraging shoppers to buy groceries online is really difficult. Canned, frozen, and dry goods might be fine to purchase online, but customers traditionally have preferred buying fresh produce in a brick-and-mortar store.
To overcome this problem, Amazon has experimented by encouraging shoppers to pick up Amazon deliveries in Whole Foods locations, where they can shop for groceries at the same time. Amazon also introduced Amazon Fresh and Whole Foods Market for Prime members allowing customers to receive groceries delivered within 2 hours. Although cashier-less Amazon Go stores were introduced some time ago, the first full-sized Amazon Go Grocery was introduced in February of this year.
By offering home delivery, Whole Foods grocery pickup, and now Amazon Go Grocery, shoppers now have a wide range of shopping options that significantly reduce the need for interactions with other people.
As more people are exposed to these newer shopping options today due to necessity, it seems likely many shoppers may become reluctant to go back to waiting in long lines, which may permanently change their shopping habits.
In fact, masses of new customers being exposed to the variety of convenient shopping options Amazon has created may force competitors to follow in their footsteps. Competitors like Walmart may have to either create their own cashier-less, AI-driven technologies, do the unthinkable — lease the technology from Amazon, or risk falling further behind.
Prime membership provides a number of shopping benefits to Whole Foods and Amazon Go customers. Additionally, the current pandemic is driving a whole new range of customers to Prime memberships for the entertainment benefits.
Although it cost the company some profitability in 2019, Amazon now boasts over 150 million Prime members, worldwide. Again, switching North America to 1-day prime deliveries has played well into the hands of the company, making home deliveries of groceries even more convenient and cost-effective.
Prime members have access to Amazon’s enormous library of music, books, games, TV shows, and movies. Now that millions of people are spending more time at home, Prime’s entertainment features must also be currently drawing in large numbers of new members.
Bezo’s said in a statement after announcing 2019 Q4 results;
Prime members watched double the hours of original movies and TV shows on Prime Video this quarter compared to last year, and Amazon Originals received a record 88 nominations and 26 wins at major awards shows.
The longer this pandemic continues, the more customers will eventually take the plunge and try out a Prime membership. Considering the world may be stuck in the current situation for another 12–18 months, it seems reasonable to assume Prime memberships will continue to rise briskly.
If you don’t already know, AWS — Amazon Web Services — is the market leader for cloud infrastructure solutions. Growth has slowed in this division slightly over the years but it continues to be the most profitable and one of the fastest-growing divisions for Amazon.
Last year AWS grew at 34%. In Q4 of 2019, AWS brought in nearly $10 billion in sales. Although AWS only made up 12% of sales for Amazon in 2019, it delivered $2.6 billion in operating profit in Q4 and just over $9 billion for the full year.
According to ZD Net;
‘AWS operating income for FY 2019 was $9.201 billion. By comparison, FY 2019 North America operating income was $7.033 billion, while International posted a loss of $1.69 billion.’
AWS brings in nearly $10b in sales for Amazon in Q4, hits $40b annual run rate | ZDNet
Amazon Web Services brought in $9.95 billion in net sales for Amazon in the fourth quarter of fiscal 2019, giving the…
In 2020 Q1, I suspect AWS will see solid growth from customers like Netflix, Disney, Slack, Unilever and Spotify as they add to their cloud computing power to service stay-at-home customers.
On the other hand, I see potential problems for AWS in subsequent quarters as customers like Expedia, Siemens, Ticket Master, Quantas, and BMW face significant pressure from the current halt in worldwide business.
For example, in a recent CNBC interview, Expedia’s chairman, Barry Diller stated “Expedia has no revenue,” and expects to cut Expedia’s advertising budget from around $5 billion to as little as $1 billion or less this year.
I have to imagine many companies are reconsidering their cloud-computing budgets as it becomes clear the pandemic will drag on considerably longer than many businesses initially expected. A longer-than-expected economic slowdown could end up becoming a serious drag on AWS growth in Q2 and beyond as Amazon’s financially stronger customers review budget over-spending and the financially weaker customers start going bankrupt.
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Although currently behind Facebook and Google in the digital ads arena, Amazon’s ad revenue grew 40% in 2019, surpassing $4 billion in the fourth quarter. Analysts have long considered Amazon’s advertising potential to be huge and Amazon is demonstrating its long-term ability to generate advertising revenue.
However, considering the current economic situation, advertising is likely to suffer, if not in Q1, certainly later in the year. As mentioned above, hard-hit companies like Expedia are already drastically cutting advertising budgets in a desperate attempt to save cash and the online advertising industry expects a serious downturn.
However, a pandemic-linked slowdown in advertising may not be all bad news for Amazon. In fact, Amazon spent around $11 billion in 2019 for its own advertising needs, far exceeding the advertising revenue Amazon generated from its own customers in the same year. It’s been reported Amazon has dramatically cut spending on advertising in 2020.
The cut in ad spending might be because of the surge in demand for everyday items to be delivered right to customers’ doors. It could also be partially in response to Amazon’s own dramatic decline in advertising revenue. Either way, Amazon has the flexibility to adjust ad spending in response to a number of variables that will remain unclear until Amazon releases Q1 results.
Amazon has been delivering superior returns to investors for years. The powerful combination of Prime memberships, grocery delivery, semi-automated services, and cloud computing services has positioned Amazon to come out of this economic downturn in great shape. However, we also have to consider the serious possibility that there could be a considerable financial strain on Amazon over the next few quarters.
Steve Mnuchin thinks America will go back to work sometime in May — I do not. I can’t find any credible scientist who thinks the current pandemic crisis will be resolved anytime soon.
If you’re still on the fence about the duration of this economic slowdown, I suggest you consider the following — As far as I can tell, there are primarily two schools of thought concerning the future direction of the markets;
- Don’t fight the Fed and
- Bailouts can’t cure a virus.
I’ve worked professionally and invested privately since 1998. Even so, I’ve decided to listen to the scientists on this one – not financial experts. I believe in science, so I’m going with door number two.
Even the WHO has changed its tune …
WHO head warns worst of virus is still ahead
The head of the World Health Organization has warned that "the worst is yet ahead of us" in the coronavirus outbreak,…
Most western countries have neither locked down their populations as China did, nor tested, monitored, and initiated extensive tracing to chase down outbreaks the way South Korea has. The patch-work approach makes it difficult to see how western workers will be able to go back to levels of work seen previous to the pandemic anytime soon with the risk of future infection waves threatening.
Even if investors are betting western countries can successfully roll out wide-spread testing, it still won’t guarantee a rapid return of the economy to full capacity. If China and South Korea are examples of what life will look like after shelter-in-place orders are lifted, it could take a significant amount of time before we see things go ‘back to normal’.
I’m guessing Amazon’s first-quarter numbers are going to look pretty solid. However, Amazon’s stock price has gone straight up since early April, meaning most of Amazon’s pandemic-related sales are already ‘baked in’ to the stock price.
If I were a long-time holder of the stock I think I’d hold tight. A number of experts believe there’s a reasonable chance Amazon may report above guidance due to pandemic sales. Even if they don’t investors are sitting on a lot of short-term profits. Long-term investors should be able to absorb some losses, particularly if Amazon continues its torrid growth in 2021.
Unfortunately, I’m not a current Amazon shareholder. Unfortunately, I made a bad bet by selling at just over $1800 on the first dip down due to uncertainty how much of an effect the pandemic would have. After all, Amazon suffered large losses in both the dotcom meltdown and the 2008–2009 recession.
I have to confess I miscalculated and now Amazon’s stock price has gotten away from me and I’m sad. : (
However, I’m not in a panic to buy. Amazon is still a disruptive stock and is notoriously volatile. I’m still extremely concerned, as this slowdown continues to bite, we could see significant slowdowns in both corporate and consumer spending. As I mentioned in an article last week, I believe we are in the middle of a massive bull trap. If wide-spread bankruptcies and a deeper economic slowdown are coming, even mighty Amazon may not be immune.
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I love Amazon, both as a customer and as a one-time shareholder. I plan to own a significant number of Amazon shares in the future. I have absolutely no doubt Amazon will continue to dominate its competitors and take market share from retailers like Walmart, even if Amazon loses some market share to competitors like Microsoft and Google in the cloud computing sector. I also am convinced Amazon will see significant growth in entertainment and internet shopping revenue throughout 2020, and explosive growth in advertising as businesses come back online in 2021 and beyond.
However, I don’t think this is the time to pull the trigger on Amazon stock. It’s not a good idea to panic sell, but it’s not a good idea to chase a stock either. Even if we don’t go into a long, deep bear market, I suspect I will be able to purchase at a significantly lower price, sometime later this year as markets re-test the lows experienced in March.
Disclosure — I currently do not have any long or short positions in Amazon stock. Please seek professional advice before making any investment decisions.
I’m Edward Iftody – If you’d like to learn more about disruptive investing, I encourage you to read more at www.blockchainin.asia