Mon. Jan 20th, 2020

Amazon had its worst stock performance in 3 years and lagged other tech giants in 2019 — here’s what Wall Street thinks is ahead for the company this year (AMZN)

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Amazon had its worst stock performance in 3 years and lagged other tech giants in 2019 — here’s what Wall Street thinks is ahead for the company this year (AMZN)

  • 2020 is shaping up to be a big year for Amazon.
  • From cloud computing to same-day shipping, expectations and competition for Amazon are heating up.
  • Here are some of the key aspects of the business to watch this year.
  • Click here to read more stories on BI Prime

Amazon had a relatively tough year in 2019.

Investors grew concerned about Amazon’s massive investments in faster delivery and its AWS cloud unit. The increasingly hostile regulatory environment and growing competition also dampened investor sentiment.

As a result, Amazon’s stock went up just 23% in 2019 — its worst performance in three years and below the S&P 500’s returns for the first time since 2014, according to the S&P Global Market Intelligence. Other tech giants, like Apple, Facebook, Alphabet, and Microsoft, all saw their shares do better than Amazon during the year.

We asked Wall Street analysts what’s ahead for Amazon in 2020.

While most of them remain bullish, they said this is the year investors are hoping to see more concrete results from all the investments Amazon has been making, across shipping, cloud computing, and hardware devices. They’re also keeping a close eye on how Amazon’s competitive landscape will change in the cloud space, and whether its newer businesses, like advertising, will continue to show strong growth.

Here’s what analysts think is ahead for Amazon in 2020:

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Last year’s underperformance comes after years of dramatic growth for Amazon. Almost all of the analysts who cover Amazon still recommend buying its stock.

The biggest drag on Amazon’s stock last year was the huge investments in one-day shipping and AWS cloud, analysts say. Investors tend to have general skepticism until they see any payoff from the spending.

Still, Wall Street analysts remain more bullish than ever about Amazon. In fact, 47 of the 49 analysts that track Amazon’s stock recommend buying it, according to Factset. That’s more endorsements than any other S&P 500 company.

UBS’s Eric Sheridan told Business Insider that there’s been a lot of questions about Amazon’s rate of investment over the past year. But he thinks those fears are “overdone” now, and that Amazon’s stock is actually undervalued at the current price given its upside potential.

“We think the risk reward sets up very well,” said Sheridan, who has a “buy” rating and a price target of $2,100 for Amazon.

Not all analysts are convinced by Amazon’s investments yet. Andrew Murphy, an analyst for Loup Ventures, said Amazon’s stock is “fairly valued” at its current levels, as there’s still a lot of investor concern around its spending.

“Amazon is tightening its death-grip on retail, but the associated costs and the impact on margins may weigh on the stock in 2020,” Murphy told Business Insider.

Amazon’s one-day shipping initiative and its financial impact will continue to draw investor scrutiny this year. But most analysts believe it’s the right investment that will lead to long-term growth.

Amazon spent roughly $3 billion in shortening its delivery time last year to make one-day shipping the default for all Prime members. Some investors were caught off guard by the size of the investment, which cut into Amazon’s bottom line. 

But most analysts say the investment is the right move for Amazon’s long-term success. For example, Amazon disclosed in its most recent earnings that people bought more products on its site after rolling out one-day shipping. It also said in late December that it had record holiday sales, driving its stock up by almost 5%.

Hari Srinivasan, an analyst at Neuberger Berman, told Business Insider that the investment in shipping was a big hit to Amazon’s profitability and was the main reason for the stock’s underperformance. But he believes it’s the right move and the investments are already starting to pay off in increased sales.

“In the short-term, the profits are going to be depressed,” Srinivasan said. “But the payback over the long-term is going to be very attractive.”

Another area of concern is the AWS cloud unit’s slowing growth. Some analysts believe it is due to the increased competition from Microsoft and Google.

Amazon’s AWS cloud unit remains its biggest profit driver and one of its fastest growing segments. But the cloud unit’s growth slowdown has been noticeable lately, as it dropped below the 40% rate for the first time last year.

Some analysts believe the deceleration is due to intensifying competition from Microsoft and Google. Dan Ives at Wedbush Securities told Business Insider that the two companies are “clearly narrowing the gap” with AWS, and that 2020 will be an “inflection year” for Amazon to defend its turf in the cloud.

Some analysts, however, argue it’s simply a law of large numbers. AWS is generating over $35 billion in annual revenue, and at that scale, it’s only natural to see its growth drop below the 40% threshold, said Neuberger Berman’s Srinivasan.

“I think the growth rate will stabilize in the 30% to 35% range in 2020, and once it does that, people will become much more positive,” he said.

The regulatory environment will remain a risk factor, but most analysts believe it won’t have a material impact on Amazon this year.

Amazon, along with other tech giants, has faced unprecedented regulatory scrutiny in recent years. Everyone from presidential candidates to European lawmakers are scrutinizing Amazon’s market power and business practices. President Trump has long been Amazon’s biggest critic.

But the political pressure hasn’t really damaged Amazon’s business in any meaningful way yet. Amazon’s sales continue to grow, and it still remains the market leader in both e-commerce and cloud computing. 

In a note published last month, Colin Sebastian, an analyst at Baird Equity Research, downplayed the regulatory risk, saying the bigger risk is “management distraction and/or slowing innovation” that could come as a result of the increased scrutiny. 

UBS’s Sheridan said Amazon is less exposed to regulatory issues than other tech giants, and that the regulatory risk is no longer considered a top of mind issue for many investors compared to a year ago.

“I would say that it has receded a little bit as a fear or risk,” Sheridan said.

Expect Amazon to open more physical stores as it looks to expand its grocery business.

It’s no secret Amazon wants to grow its physical store footprint. In addition to the Whole Foods stores, Amazon now runs a variety of physical store formats, including bookstores, cashierless Go stores, and 4-star stores that only showcase highly-rated products. It’s also planning to launch a new type of grocery chain that is separate from Whole Foods.

That expansion is likely going to accelerate this year, analysts say.

Murphy at Loup Ventures pointed out that Amazon doubled the number of physical retail stores, excluding Whole Foods, from 27 in 2018 to 54 by the end of 2019, while nearly tripling the number of its cashierless Amazon Go stores to 24 in total. He predicts Amazon to open 30 more Go stores in 2020, and to potentially launch a larger format store that runs on its cashierless technology.

RBC Capital’s Mark Mahaney wrote in a recent note that he also sees a faster rollout of Amazon Go stores in 2020 as it could help drive more sales, especially for grocery products.

“In the long-term, we see the potential for a nation-wide distribution of grocery stores somewhat akin to its fulfillment center network,” Mahaney wrote in the note.

Investors are starting to wonder how Amazon wants to monetize its massive Alexa voice assistant ecosystem.

Amazon has poured a lot of resources into its hardware business, especially following the success of its Echo and Alexa voice-assistant products. 

That’s helped Amazon become the leader in the smart speaker market. But it now has to prove how it plans to make money off of its growing device ecosystem, says Loup Ventures’s Murphy.

Murphy said investors will start looking for more evidence of the financial benefits of Amazon’s hardware business, as the company doesn’t disclose any meaningful sales figures for the segment. The bigger challenge, he said, is the fact that Amazon still doesn’t have any presence in the broader smartphone space, making it more difficult to compete with Apple or Google.

“Amazon needs to prove how it will monetize the device ecosystem it has established with Ring, eero, and the slew of Alexa devices,” Murphy said.

Newer segments, like advertising and shipping, will continue to grow.

While Amazon makes most of its money from its retail and cloud businesses, investors are equally interested in its newer businesses, like advertising and in-house shipping.

Baird’s Sebastian wrote in his note that Amazon has “significant growth opportunities” in newer segments like shipping, advertising, and international marketplaces. He said those businesses could be bigger growth drivers for the company, as they are “widening the scope of operations and expanding market opportunities” for Amazon.

Advertising, in particular, continues to draw significant interest from investors, RBC’s Mark Mahaney wrote in a note last month. He forecasts Amazon’s advertising business to reach $30 billion in revenue by 2020, as it still has a lot of untapped opportunities within search and other platforms like Fire TV.

History suggests Amazon will bounce back this year.

If you believe in past data, Amazon will probably outperform the broader market this year. 

That’s because Amazon’s stock has never underperformed the market for two consecutive years in nearly two decades, according to Suntrust’s analyst Youssef Squali. 

The only time it underperformed the market for two straight years was in 2000 and 2001, during the dotcom crash, he wrote in a note last week. 

“While past price performance is no guarantee of future results, we believe the stock’s underperformance in 2019 creates a compelling set up for 2020,” Squali wrote.

Squali also noted that, based on past results, Amazon’s one-day shipping could reaccelerate its sales growth this year. When Amazon launched free two-day shipping in 2005, it saw strong revival in revenue, going from 22% year-over-year growth to a 32% compound annual growth rate over the next five years — and could have grown even faster had the 2008 recession hadn’t happened, he wrote.

Most importantly, Wall Street seems to trust Amazon CEO Jeff Bezos and his leadership team to make the right long-term investment, given the company’s track record.

Amazon’s biggest strength may be the fact that Wall Street puts a lot of trust in its leadership team, including CEO Jeff Bezos, to make the right call when it comes to making long-term bets. It’s why Amazon has been able to keep up its stock price even though it’s run on thin profits for the most part.

Neuberger Berman’s Srinivasan said the current investment cycle makes more sense because Amazon is not spending on some obscure moonshot project. They’re more operational investments that have clear customer benefits, and the results are already starting to show, he said.

“Jeff Bezos is the most forward looking tech entrepreneur that’s out there in the market,” Srinivasan said.

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