Amazon Stock: Near Term Weakness But Positive Long Term Prospects

Amazon’s (NASDAQ:AMZN) share price has dropped 39% over the past year amid investor concerns over the company’s prospects. However, Amazon’s near term headwinds are mostly transitory and the company is well-placed to capitalize on significant growth opportunities in healthcare and logistics.

Near term challenges are transitory

Amazon’s revenues have been slowing; the company reported revenues of USD 514 billion for the year ended December 2022, up 9% YoY which is the company’s slowest revenue growth in years.

Much of the slowdown was driven by macro weakness during the year stemming from rising inflation, rising fuel prices as well as a normalization in online shopping behavior post-pandemic as consumers began shifting spending back to services such as travel. Sluggish economic conditions meanwhile saw corporate customers limit ad budgets and optimize cloud spend.

All product and service groups except physical stores decelerated during the year (but still grew at double digit growth rates), with the slowdown led by online stores – Amazon’s biggest revenue stream – which saw revenues drop by less than 1%. Physical stores was the only group to see an acceleration in revenue growth (possibly a reflection of consumers returning back to in-store shopping), with revenues up 11% YoY in 2022 compared with a 5.2% YoY increase in 2021.

Amazon’s aggressive cost-cutting efforts starting last November (from shedding 18,000 jobs to subletting excess warehouse space) suggests management expects further weakness in the near term. Inflation in the U.S. – Amazon’s biggest market – is receding but interest rates are expected to rise or remain elevated for the year (the Fed raised interest rates in February and expects ‘ongoing’ increases). Economists are mixed as to whether the U.S. would soon slide into a recession but even if the U.S. does escape a recession as Goldman Sachs and the IMF predicts, the U.S. economy is still expected to slow, which could impact consumer and corporate spending.

Amazon’s near term headwinds however are transitory, and fundamentally the company is much the same. As consumer and corporate spending recovers on the back of a pick up in economic activity, Amazon should benefit. eCommerce sales in the U.S. are expected to continue growing (at a double digit CAGR over the coming five years) and digital ad spending is on the rise as well (also at double digit CAGR over the coming four years), both positive trends for Amazon. In addition, Amazon, as king of eCommerce, is likely to continue taking online ad spend market share from incumbents Google (GOOG) (GOOGL) and Meta (META) (Amazon currently accounts for around 7.3% of the overall digital ad market).

Moreover, Amazon is exploring numerous growth avenues and there are reasons to be optimistic about the company’s prospects.

Riding on the D2C eCommerce trend with ‘Buy With Prime’

D2C (direct to consumer) eCommerce has been growing in the U.S. a trend spearheaded by retail giants such as Nike (NKE). Now, smaller merchants are moving into the D2C eCommerce game and Amazon has been quick to jump on the opportunity with the launch of ‘Buy with Prime’ whereby D2C merchants can offer their customers fast free shipping and a seamless checkout experience, two major conversion drivers, through a simple button installed on their online store. The new button solves a key pain point; online shoppers are increasingly expecting fast and free shipping as well as a hassle-free checkout experience but smaller merchants, operating across a myriad platforms and carriers, may struggle to offer an optimal shopping experience resulting in high cart abandonment. ‘Buy with Prime’ is envisioned to help D2C merchants boost conversion rates by tapping into Amazon’s 200 million Prime subscriber base which covers nearly two thirds of all U.S. households, and Amazon indirectly profits from the D2C trend through FBA fees and Amazon Pay fees (‘Buy with Prime’ is available only for merchants using Fulfillment by Amazon to handle shipping and Amazon Pay for payments). Increased logistics network utilization should be a positive on the company’s cash flows as well.

The D2C trend is still at early stages and Buy with Prime was launched just last April (and that too by invitation only) and was only expanded to all US merchants starting last month. D2C sales in the U.S. is expected to grow nearly 17% annually between 2022 and 2024 (reaching USD 200 billion in sales by then) and as ‘Buy with Prime’ penetration increases, Amazon should be in prime position to benefit, offsetting any consumer spending slowdown near term and contributing to online retail revenue growth long term.

Shaving off costs and improving profitability through automation

With 1.5 million employees worldwide, Amazon is the world’s second biggest employer and earth’s most customer-centric company is now looking to be earth’s best employer as well. Towards this end, the company has been investing heavily into robotics and automation and Cathie Wood foresees Amazon possibly having more robots than employees by 2030. Robots are generally cheaper and more efficient than humans and are expected to complement, rather than completely replace humans, potentially helping Amazon shave off considerable sums in labor costs while paying higher wages to their employees and retaining its current workforce. Attrition for instance reportedly costs Amazon nearly USD 8 billion a year, savings which could be deployed into powering Amazon’s growth initiatives (such as Amazon’s online retail efforts in India for instance where Amazon has invested more than USD 6.5 billion over the past nine years).

Potential new long term growth pillars: healthcare and logistics

Amazon’s trail of acquisitions suggests the company is working on two potential growth pillars: healthcare and logistics. There are not many industries that could move the needle for a USD 500 billion revenue company, but these two sectors (both trillion dollar industries, healthcare at more than USD 4 trillion and logistics at USD 1.4 trillion in the U.S. alone), are sufficiently large to make it worth Amazon’s attention and could potentially support long term growth.

Healthcare:

Amazon has made a slew of acquisitions in the healthcare space including PillPack in 2018, and One Medical in 2022. The company has also been actively launching new businesses including Amazon Pharmacy (launched in 2020), Amazon Clinic (launched in 2022), and Amazon RxPass (launched this year) while shutting others (including Amazon Care, and Haven).

Like Apple (AAPL), Amazon is notoriously secretive, so their healthcare ambitions are not entirely clear. What is clear however is that Amazon has long prioritized long term growth over short term profits, and healthcare, a highly regulated industry, is not likely to be disrupted overnight. After years of investment and experience, Amazon has more of the pieces to form a healthcare ecosystem (currently comprising telehealth, in-person primary care, diagnostics, pharmacy, wearables, and grocery) and could be getting closer to building out a one-stop-shop primary healthcare platform which would be synergistic to their existing businesses and generate additional revenues across their range of product and service groups including fulfillment services, advertising, subscriptions, and possibly even grocery.

Amazon may also be eyeing the healthcare logistics opportunity which is a USD 10 billion business for logistics rival UPS. The healthcare opportunity has rivals such as UPS (UPS) and Walmart (WMT) working to carve out a share for themselves but Amazon has a competitive advantage thanks to its Prime customer base, which allows it to scale far faster and relatively more cost efficiently.

Logistics:

Cross border eCommerce is growing and Amazon (which already has about 50% of shipping volumes in the U.S and continues to take share from rivals such as UPS and FedEx (FDX) who recently announced capacity cutbacks) could take share on international parcel shipments. Amazon already has a growing logistics network in overseas markets such as the United Kingdom (where it is the country’s second-largest courier) and the company continues to expand its network; Amazon recently launched Amazon Air in India and plans to set up a warehouse in eastern China to speed up deliveries from Chinese suppliers selling on Amazon’s eCommerce platform. Again, Amazon’s domestic rivals don’t have the advantage of a loyal customer base (and therefore a loyal merchant base as well), giving Amazon a considerable advantage as a middle man between the two, which nicely positions the company to capture global parcel market share in the process.

Risks

After settling an antitrust case with European regulators in September last year, Amazon reportedly could find itself in another one with the Federal Trade Commission. It is not uncommon for large companies to be the subject of antitrust lawsuits but distracted management, harsh penalties or at worst a break up of the company are potential headwinds that could impact share prices.

Conclusion

I think Amazon’s near term weaknesses are transitory and the company still has untapped avenues to support long term growth. While it remains to be seen how well Amazon capitalizes on these growth opportunities, Amazon’s ecosystem (which functions as a glue between buyers and sellers) gives them a competitive advantage as an intermediary, enabling them to scale and expand into new industries better than rivals. Amid uncertainties over antitrust lawsuits, some may view Amazon as a hold while others may view Amazon (whose share price is down 39% over the past year) as an opportunity to buy.

Analysts are mostly bullish on the stock.