Amazon (AMZN 0.58%) looks like it's back in action after several quarters of sluggish growth and its first annual loss in a decade in 2022. It's a perennial investor favorite, and there's good reason to be confident about its future.
But no company is infallible, and Amazon has its fair share of ongoing struggles. When investing, you need to take off your rose-colored glasses and get full-on into any murkiness to make informed decisions. So without discounting any of the green flags, it'd be prudent to watch out for the following three red flags that could sink the stock.
1. E-Commerce isn't what it used to be
The trajectory of e-commerce as an industry has fluctuated over the past few years, stemming primarily from reactions to the COVID-19 pandemic. After quickly moving online, consumers scaled back digital purchases when stores reopened. They're now moving to a new era of omnichannel shopping, where digital plays a bigger role in a life that still involves brick and mortar.
To be clear, Amazon still commands nearly 38% of the total e-commerce market, an almost unchallengeable lead.
But that's a smaller market share than in the years leading to the pandemic. Investors must keep in mind that the rise and acceleration of e-commerce activities for almost any retailer with a digital storefront eats away at Amazon's dominance. And while these small players won't take over the industry, they could be impeding Amazon's growth in the respective segment.
The company has been counting more and more on third-party sellers to generate growth for its e-commerce business, which hasn't been posting high growth. It did make a comeback in the 2023 third quarter with a 7% year-over-year increase, but otherwise it has been slow at best.
Third-party seller sales, on the other hand, continue to demonstrate robust growth and are increasing their total percentage of overall e-commerce sales and now account for about 60% of it.
That could be a problem because third-party sellers often use Amazon as a platform in addition to other platforms. The company recently inked a deal with Shopify for Shopify's merchant clients to use Buy With Prime as a payment option, which funnels back some proceeds to Amazon.
It also offers Buy With Prime for other online retailers, since it has become increasingly reliant on outside sources to drive revenue in e-commerce.
2. The FTC is on its back
Related to the third-party e-commerce business is the Federal Trade Commission (FTC) lawsuit, which alleges that Amazon requires third-party sellers to have their lowest prices on its site and face consequences if they don't.
That was an official policy until it was changed in 2019, but the lawsuit says the practice is ongoing, with sellers facing lower rankings in search results if they don't comply. The lawsuit also says that sellers feel pressure to use Amazon's fulfillment network in order to perform well, requiring high costs to use the services, and that they need to raise prices to make it work.
It also alleges that the company has tested raising prices on its products and seeing if other retailers would keep up, leading to increased prices for consumers.
Amazon has countered these claims, and others, by either explaining how these practices are being misconstrued or why the intended outcomes are positive, not negative. The results of the lawsuit could lead to forced changes in Amazon's operations that could seriously affect sales growth and profits.
3. It's facing strong competition in cloud computing
Amazon Web Services (AWS) is still the leader in cloud computing with a reported 32% market share, versus 22% for Microsoft's Azure and 11% for Alphabet's Google Cloud. However, its sales increases aren't as big as what those other two are seeing, and it's facing numerous smaller competitors. AWS sales increased 12% year over year in the 2023 third quarter, while Azure sales increased 29% in that period, and Google Cloud sales increased 22%.
AWS has recently launched an array of groundbreaking generative artificial intelligence (AI) services that could be a game changer for users and get back market share. But this is a key revenue and profit driver for Amazon and investors must keep an eye on further developments here.
I would still buy Amazon stock today
Considering all of the above, you might think I'm suggesting that you stay away from Amazon stock. But I see the positives outweighing the negatives. Even with some holes in the ship, the company isn't going down so fast. It has a strong pipeline of innovation, an unbeatable amount of market share in e-commerce, and a growing set of AI-powered cloud computing services.
Amazon probably isn't the same high-growth opportunity it once was, but it can still be an excellent addition to a diversified portfolio for many investors. No stock is foolproof, and as long as you understand the bear argument, you can feel confident choosing the bull case.
