Momentum doesn’t last forever, and Amazon is losing first-mover advantage on two fronts: e-commerce and cloud.
SAN FRANCISCO — Shares of Amazon topped $1,000 Tuesday, a milestone that reflects its meteoric rise. So, next stop $2,000?
Analysts on Wall Street are overwhelmingly bullish — only one brokerage has a hold and none have “sells”, according to Bloomberg terminal data, and some of the most optimistic see shares hitting $1,250 in the next 12 months. Few want to miss out on one of the Internet’s biggest stock runs. Amazon shares are up 38% from a year ago and 14 times more valuable than they were a decade ago.
Yet momentum doesn’t last forever, an investing reality Apple shareholders finally faced two years ago.
The biggest threat to Amazon (AMZN) is the competition coming up in its rearview mirror, say analysts. In part because of CEO Jeff Bezos’ willingness to continually reinvest in research and new areas, the Seattle-based company has long had a massive first mover advantage in both retail and web services. That is now changing.
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“Amazon is still the leader but the competitive environment is intensifying, ” said Ed Yruma, managing director at KeyBanc Capital Markets.
Effectively, Amazon is two companies, one a retail e-commerce company that’s building out a global marketplace and the other a cloud storage and services company that accounted for the biggest share of the company’s consolidated operating income in the first quarter of 2017, outflanking retail profits.
On the retail side, arch-rival Walmart is the main potential roadblock to Amazon’s continued growth. Determined to move into e-commerce and with the advantage of a massive brick and mortar store base, Walmart is increasingly dynamic, Yruma said.
Wal-mart has focused its efforts more on middle-income consumers. Amazon, in contrast, has made more inroads with upper- and upper-middle income consumers, said Yruma.
“You’ re going to see more of the middle-income consumer moving to e-commerce — and they don’ t have any loyalty to Amazon, ” said Yruma.
With Walmart’s enormous logistics and distribution network, and its acquisition of the e-commerce company Jet.com last year, “they could very well begin to take away some of Amazon’s business, ” said Scott Rothbort, a professor at Stillman School of Business at Seton Hall University.
The upside for Amazon is that there’s still a lot of market to move into. Edward Jones estimates that while current U. S. spending online is about 15% of the retail market, it could rise to as much as 30% in the long run.
“So there’s a lot of runway there, ” said Edward Jones Amazon analyst Josh Olson.
While consumers think of Amazon as an e-commerce giant, in terms of profit its cloud computing business, AWS, is actually stronger. Amazon remains the clear leader in cloud computing, well ahead of both Microsoft and Google.
“Their web service business is their real growth area, that has much fatter margins and is something I think they’ re going to be able to expand more rapidly, ” said Seton Hall’s Rothbort.
A driver of Amazon’s success has been its strong focus on both the consumer and investment in new technologies that keep it well ahead of the pack.
“That’s the primary risk right now, that they overinvest, at least in the short term, and that puts pressure on profits, ” said Olson.
Bezos got a pass from investors for years on profits, seemingly impervious to Wall Street’s hunger for continual quarterly returns. With increasing profits over the past few quarters, there is some concern that the market might not be as forgiving should those returns fail to continue.
However Olson thinks that there’s substantial confidence that Amazon will continue to be prudent.
“Bezos has proven he’s focused on the long term, on shareholder return and the consumer. He understands both sides of the equation, ” he said.
