Amazon.com (AMZN -1.64%) is a fantastic success story in the world of business and technology. The stock has soared over the past decade. Revenues have climbed from $34 billion in 2010 to a mind-boggling $281 billion in 2019.
Founder and CEO Jeff Bezos continues to run the company with the mindset that it is always Day 1. That's his way of describing a corporate culture characterized by "customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision-making." In his 2016 letter to shareholders, Bezos gave investors a glimpse into what Day 2 is -- stasis, followed by irrelevance, decline, and, ultimately, death.
Even as Bezos keeps reminding everyone that Amazon is still in Day 1, the behemoth corporation will one day arrive at the feared Day 2. The company's numbers since its May 1997 IPO have been nothing short of astonishing, but its growth will eventually decelerate simply due to its large size. Let's break down the challenges Amazon faces in each of its three major businesses.
Image Source: Amazon.
E-commerce
It comes as no surprise that the coronavirus pandemic has altered the shopping landscape by accelerating e-commerce sales and slowing sales for brick-and-mortar retailers. Both trends benefit Amazon substantially. According to research from eMarketer, Amazon will increase its share of the U.S. e-commerce market by 1% to 38% this year.
However, the pandemic has forced competitors to bolster their own offerings. In the first quarter of 2020, Target saw its digital comparable sales shoot up more than 140% compared to the prior-year period. Walmart's e-commerce sales in the same period rose 74%. Walmart also recently announced a new partnership that will allow 1,200 Shopify sellers onto its Marketplace platform by the end of this year. Additionally, in May, Facebook launched Facebook Shops, its own seller platform that helps struggling small businesses adapt to an online world. It's no doubt that Amazon still has the lead in e-commerce, but others are investing heavily for a piece of the pie.
Besides competition, the company also faces the risk of antitrust charges . Accused of using third-party sales data to benefit its own private-label offerings, Amazon could lose the confidence of sellers who now have growing online sales channels.
Prime
In Q4 2020, Amazon had about 112 million paid Prime members in the U.S. alone. But consider the fact that there are 120 million households in the U.S. and that most homes have no need for multiple Prime accounts. It's clear that the growth opportunity for Prime domestically is very limited.
Amazon has, however, experienced rapid growth in Brazil since launching Prime in September of 2019. The company will have to continue tapping international markets to expand its subscription business. This is a tough task, with massive established competition and varying shopping behaviors present in the fastest-growing regions of the world.
AWS
Amazon Web Services' revenue growth has slowed over recent years, primarily due to robust offerings from other tech giants. While revenue jumped nearly 70% in 2015, growth almost halved in 2019 as AWS sales climbed just 36.5% compared to 2018. Microsoft's Azure is a viable force and now owns 18% of the market. Larger companies may prefer to do business with it as they have been purchasing Windows and Office software for years.
Amazon's various business units all gather huge amounts of data, supporting and improving operations across the board. Potential AWS customers may be watching the antitrust concerns surrounding Amazon's e-commerce business and choose not to surrender more data to the company by going with a competing service.
And lastly, the rumors swirling about a potential spin-off of AWS should be top of mind for owners of Amazon stock. The high-margin, capital-light, and market-leading attributes of AWS all contribute mightily to the valuation of Amazon as a whole. A separation of the businesses would certainly shift investor interest.
Day 2
For a company with a $1.4 trillion market capitalization, the recent growth has been absolutely impressive. With new digital partnerships now posing a serious threat in e-commerce, limited expansion opportunities for Prime in the U.S., and a heightened competitive landscape in cloud computing, we are already seeing signs that growth is slowing down. Investors should temper expectations going forward, but a PE ratio close to 140 has failed to scare them away. We might still be in Day 1 for a while longer, but I'm sorry, Mr. Bezos -- Day 2 is coming.
