Shares of the cloud and e-commerce giant are up just 13% so far in 2019, lagging well behind the S&P’s gain of 25% as of Dec. 9, as well as that of fellow FAANG names Alphabet (GOOGL) - Get Report, Apple (AAPL) - Get Report and Facebook (FB) - Get Report.
It isn’t every day that Amazon looks like the runt of the litter. Here are a few of the key challenges facing Amazon in 2020.
1. Growth Concerns
Amazon surprised some investors by issuing lighter-than-expected fourth-quarter guidance, forecasting between $80 billion and $86.5 billion in revenue for the holiday quarter versus analysts’ estimates of $87.4 billion. It also missed analysts’ third-quarter profit expectations, pinning the miss in part on its investments in ramping up one-day shipping.
Those third-quarter results had some investors wondering if lighter profits and revenue guidance could portend an extended deceleration both in Amazon’s core e-commerce business and its profit powerhouse AWS.
Cloud rivals Microsoft (MSFT) - Get Report Azure, Google Cloud and others have incrementally gained market share in the evolving market for cloud services. That may be one reason for Amazon’s response to the Pentagon’s decision to award the sought-after JEDI cloud contract to Microsoft: It recently sued the Defense Department, alleging that it lost the deal because of President Donald Trump’s personal vendetta against Amazon CEO Jeff Bezos. For Microsoft, winning the Pentagon deal “speaks to a new chapter of Redmond winning in the cloud vs. Amazon,” wrote Wedbush analyst Dan Ives in a Dec. 9 note. For Amazon, it looks like a stinging setback and a sign that cloud dominance isn’t a foregone conclusion.
2. Antitrust Matters
Amazon isn’t alone in facing an antitrust investigation heading into next year. Alphabet and Facebook are also under the microscope in both the U.S. and Europe. Reportedly, however, a probe of Amazon could extend beyond just its marketplace, which has been criticized by some lawmakers and regulators as unfair given its dual role both managing the marketplace and competing with third-party sellers.
Bloomberg reported recently that the FTC, which is taking the lead on the antitrust probe of Amazon, is looking into AWS and whether its stable of cloud computing services unfairly harms competitors, namely smaller software firms. While a forced breakup of Amazon seems unlikely, investors don't love a looming government inquiry on top of other uncertainties Amazon is facing.
What’s more, Amazon’s marketplace could find itself on the defensive for reasons unrelated to the antitrust probe. Improvements in e-commerce technology on the whole could mean that fewer sellers see Amazon as their primary sales channel, instead opting to focus on their own sites. Casey Gauss, CEO of Viral Launch, which offers tech and creative services to Amazon sellers, added that “in general, the shopping experience on traditional websites is going to improve, so more brands will start taking their own e-commerce channel more seriously.”
3. Shoring Up Trust
Amazon became the dominant e-commerce marketplace in the world by offering hundreds of millions of products at competitive prices. And in no small part, it has a vast network of third-party sellers to thank for that. But that approach could come back to bite Amazon.
Third-party sellers have made up an increasing share of products on Amazon in recent years: In 2018, roughly 58% of sales on Amazon were by third-party sellers, compared to 46% five years prior. But that comes with its own host of problems, including fakes, counterfeits and unsafe products that Amazon has not been able to successfully stamp out.
Earlier this year, a WSJ investigation found thousands of unregulated or unsafe products on Amazon, largely originating in China. That could make Amazon vulnerable to more lawsuits in the future: By individuals who may be harmed, or by brands claiming that Amazon has allowed counterfeits to proliferate. It may also have to increase spending to address the problem.
The company's reputation is also on the line. Past surveys have shown that Amazon is among the most trusted tech brands out there, but if it gains a reputation as a bazaar of sketchy products, some consumers could opt to do their shopping at first-party sites.
“I think that more and more buyers will be fed up with these experiences -- and it will force Amazon to be more transparent around who you are buying the product from,” Gauss added.