Amazon's (AMZN 3.43%) stock plunged 50% in 2022 as inflation curbed consumer spending on its e-commerce marketplace; the macroheadwinds throttled the growth of its cloud business; and its big investment in electric vehicle (EV) maker Rivian (NASDAQ: RIVN) flopped.
But in 2023, Amazon's stock surged more than 80% as investors gazed past its near-term challenges and focused on the future growth of its e-commerce and cloud businesses.
The stock will probably head higher in 2024 and beyond as its core businesses recover, but investors should still keep a close eye on two rapidly growing competitors in the e-commerce market: PDD Holdings' (PDD 2.80%) Temu and Shein. Let's see why these two cross-border marketplaces could stir up unexpected headwinds for Amazon.
Image source: Getty Images.
Why are shoppers flocking to Temu and Shein?
PDD, the Chinese e-commerce giant more commonly known as Pinduoduo, launched Temu in July 2022 to directly connect Chinese merchants to overseas buyers. Temu had racked up 250 million cumulative downloads by November 2023, according to App Magic, and it's currently the most-downloaded shopping app on iOS, Android, and Amazon's Fire OS among U.S. users. Amazon's own app ranks second on iOS and third on Android.
PDD hasn't disclosed Temu's growth in terms of revenue or users yet, but Bloomberg Second Measure estimates it had 73.3 million users in the U.S. as of April 2023. More than half of its users are in the U.S., according to App Magic, while most of its remaining users are in Mexico, the U.K., France, Germany, and Spain.
Temu is growing so fast because it sells its products at much lower prices than Amazon. Its marketplace is probably racking up steep losses, but PDD can probably afford to subsidize those losses with the rising profits from its Chinese marketplace.
Shein, which was founded in China but is currently headquartered in Singapore, mainly sells cheap apparel online by directly connecting Chinese sellers to overseas buyers. It reached 88.8 million users in 2023, according to App Magic, and 17.3 million of those users were in the United States. Its other major markets include Brazil and Mexico. It's the fourth and second most-downloaded shopping app on iOS and Android, respectively, in the United States.
Shein is still privately held, but it disclosed during an investor presentation in early 2023 that its annual revenue had risen 57% in 2021 and another 45% in 2022.
The company became the world's largest fashion retailer by revenue in 2022, and it plans to keep growing its sales at a compound annual rate of 37% through 2025. It also plans to go public through an initial public offering (IPO) in the U.S. in the near future.
Why should Amazon be concerned?
Temu and Shein could pull shoppers away from Amazon with two straightforward strategies. First, they could consistently undercut Amazon with cheaper products by directly sourcing them from their Chinese sellers. A lot of Amazon's own third-party merchants in China and the U.S. could also open up shops on Temu and Shein.
Second, Temu and Shein are both pouring a lot of cash into marketing blitzes on ByteDance's TikTok, Meta's (NASDAQ: META) Reels, and other social media platforms. That spending spree caused Meta's ad sales to soar over the past three quarters -- and the social media company's latest outlook suggests those ad purchases will keep climbing.
Meanwhile, Amazon's core e-commerce businesses haven't fully recovered yet. Its North American business is still in the midst of a multiyear slowdown, while its international business is staging a fragile recovery as it expands into new markets.
|
Metric |
2020 |
2021 |
2022 |
Nine Months 2023 |
|---|---|---|---|---|
|
North America revenue growth (YOY) |
38% |
18% |
13% |
11% |
|
International revenue growth (YOY) |
40% |
22% |
(8%) |
9% |
Data source: Amazon. YOY = Year over year.
Amazon's higher-margin cloud business, which usually subsidizes the growth of its lower-margin e-commerce business, also cooled off over the past two years as macroheadwinds drove companies to rein in their software spending.
In other words, Amazon's core business hasn't fully stabilized yet, and intense competition from Temu and Shein could unexpectedly derail its near-term recovery. Investors should see if Amazon calls out Temu and Shein over the next few earnings calls and meaningfully expands its own third-party marketplace (which connects a lot of Chinese merchants to overseas buyers) to counter these hungry e-commerce challengers. If it underestimates these two platforms, its e-commerce business could suffer another disappointing slowdown and drive away the bulls.
