Why Amazon Stock Could Struggle (But Not Forever)

As of this writing, the stock market is surging to all-time highs, with the S&P 500 up a healthy 14% over the past year. One stock that has missed out on this “all-time high” party, however, is global internet giant Amazon (NASDAQ:). While markets are surging, Amazon stock presently trades 13% off its all-time highs, and is up just 7.5% over the past year.

Source: Jonathan Weiss /

In other words, while markets are soaring, Amazon stock is not. This has been the case for several months, and will likely remain the case for the next several months.

There are two big things at play here which will depress AMZN stock in the near-term. First, Amazon is in the midst of a massive “investment cycle” with free one-day shipping, which will weigh on margins. Second, Amazon is losing momentum in the cloud computing wars with Microsoft (NASDAQ:) recently winning the Pentagon’s highly coveted JEDI contract. This lost momentum will weigh on Amazon’s revenue growth rates.

For the foreseeable future, revenue growth rates and margins will likely move lower. As they do, richly-valued Amazon stock will struggle for gains.

Long-term, Amazon will survive this near-term noise, and Amazon stock will power higher. But, before the secular uptrend resumes, there will be some choppiness.

Amazon Stock Will Struggle in the Near-Term

Amazon stock hasn’t gone anywhere over the past several months. It won’t go anywhere over the next few months for two very simple reasons.

The first reason is that margins will head lower over the next few quarters. Long story short, Amazon has lost its competitive edge in the e-commerce wars, as competitors like Walmart (NYSE:) and Target (NYSE:) have built out huge omni-channel operations over the past several years that rival the omni-channel operation at Amazon.

In response, Amazon is trying to regain a competitive advantage by going from free two-day shipping, to free one-day shipping. Obviously, this move requires a huge investment, and will eat into margins for the foreseeable future. This near-term margin depression will weigh on investor sentiment, and ultimately put downward pressure on Amazon stock.

The second reason is that revenue growth rates will also head lower over the next few quarters. Because Amazon has lost its competitive edge in the e-commerce world, the company’s online commerce business has suffered from slowing growth over the past few years. The one thing keeping revenue growth rates up? Amazon Web Services (AWS).

But, that business may start to slow now, too, as Microsoft winning the Pentagon’s JEDI contract will likely propel MSFT to more cloud market share gains … at the expense of AWS. Revenue growth rates will fall, and Amazon stock will struggle.

AMZN stock will have a tough time moving higher over the next few quarters as margins and the revenue growth trajectory come under pressure.

Long Term Upside Remains Compelling

In the long term, Amazon will survive near-term margin and revenue growth concerns, and Amazon stock will shoot higher.

This is likely how things will play out. In the process of rolling out free one-day shipping, Amazon’s margins will get hit. But, once free one-day shipping becomes the standard, Amazon will win customers back from Walmart and Target. Amazon’s e-commerce business will benefit from reinvigorated revenue growth. This will kick-start more opex leverage, and Amazon will turn near-term margin compression back into long-term margin expansion — and on a bigger revenue base, implying far bigger profits.

Meanwhile, the cloud business will likely take a hit over the next few quarters as Microsoft leverages its big JEDI contract to win over various smaller contracts. But, Microsoft’s tailwinds from the JEDI contract win will eventually dry up. Once they do, market share dynamics will stabilize. So will growth rates at AWS, which should remain a big growth, big margin business for a lot longer.

Big picture: in the long run, the fundamentals underlying both Amazon’s e-commerce and cloud businesses remain favorable. Those favorable long-term fundamentals will drive Amazon stock higher in a multi-year window — but only after some near-term choppiness.

Bottom Line on AMZN Stock

At present, Amazon stock feels like a classic case of “near-term pain, long-term gain.” How should investors play this? Avoid buying more in the near term. Instead, wait for free one-day shipping to improve the e-commerce revenue growth trajectory, and wait for AWS growth rates to stabilize.

Once those two things happen, buy the dip in Amazon stock. Until then, be cautious.

As of this writing, Luke Lango was long AMZN, MSFT, and WMT. 

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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