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Amazon - Still Day 1?

Amazon still faces several big challenges ahead

I’ve long admired Amazon (NASDAQ:AMZN) and its founder Jeff Bezos. Amazon has one of the most powerful business models in the world. Although I am not a shareholder of Amazon, I’ve read every shareholder letter from the company.

For a company as powerful and valuable as Amazon, it’s natural that controversies will also follow. In the most recent issue of The Economist, an article titled “Amazon: And the second day…” laid out a few of the regulatory challenges the company faces.

First of all, Amazon’s retail business’s growth has decelerated from 27% to 18% between 2016 and 2019. Covid-19 drove the retail business revenue growth back to 23%, but this may not last. Furthermore, the pandemic-driven revenue growth came with higher cost as Amazon has to ramp up hiring to cope with the logistic challenges, resulting in a decline of 29% to profits in Q1 of 2020.

Amazon’s treatment of its warehouse employees has drawn criticism. PBS’s documentary “The Amazon Empire” interviewed some ex-Amazon warehouse employees, who had complaints about the way the company treated them and other employees. For instance, one former employee at Amazon Fulfillment Center says, "It's not just that you go in and you do your job and that's it... it's incredibly hard to meet rate while following all the sfaety procedures." Several employees on less-censored social media sites such as Facebook (NASDAQ:FB) and Twitter (TWTR) have noted that while Amazon does sometimes allow warehouse workers to take bathroom breaks, even a short bathroom break could cause an employee to fall behind strict quotas that require no pauses in order to be achieved, resulting in the threat of termination.

Adding to Amazon's Covid-19 troubles, the company simply couldn’t keep up with the increased demand, so customers had to turn to its rivals for some essential items. The crisis also made it imperative for brick-and-mortar retailers to accelerate their digital platforms, which means that it didn't increase its monopoly as much as it would have liked. Meanwhile, Canadian SAAS provider Shopify (NYSE:SHOP) has enabled its business customers to take 5.9% of online retail sales and partnered with Facebook in its push to enter the e-commerce space.

Secondly, Prime Membership’s penetration rate in the U.S has peaked as those who can afford the membership have probably signed up already. At the end of 2019, Amazon had 112 million Prime users in the U.S, according to data from Consumer Intelligence Research Partners. Future growth will have to come from an increase in membership fees and average spending per member. I think these changes are inevitable at this stage.

Thirdly, while internationally Amazon has done well in Western Europe, it hasn’t achieved the same level of success in key emerging markets such as China and India. In China, Amazon lost out to Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). In India, Reliance Jio, with a recent investment of $5.7 billion from Facebook, is taking share rapidly. In Latin America, Amazon’s 3% share of online retail is barely one-fifth that of MercadoLibre.

Amazon Web Services is Amazon’s other power house. AWS has a dominant position in cloud computin, but even growth at AWS has slowed down from almost 50% to 33% in Q1 2020. Still very respectable growth considering its size, but decelerating nonetheless. Microsoft (NASDAQ:MSFT), on the other hand, has nearly doubled its market share to almost 16%. There’s legitimate reasons for Walmart (WMT) to de-risk from AWS when choosing which cloud service provider to use, even for its suppliers.

Politically, Amazon’s not very popular in Washington D.C. Both Senator Elizabeth Warren and President Donald Trump have signaled discontent with the company's power. However, it should be noted that the politicians are targeting not just Amazon but also other big tech companies such as Alphabet (NASDAQ:GOOGL) and Facebook. For example, Warren has proposed to sunder Amazon’s private-label business from that of the third-party sellers on its platform. I think the anti-trust threats from U.S and European regulators are very real, and investors should keep their eyes on the news.

I still admire Bezos and Amazon for what the company has achieved, but above are all valid points raised by Amazon’s critics. Only time will tell what happens if Amazon can keep its “Day 1” momentum.

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About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

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