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Amazon – Challenges and Opportunities Ahead

September 8, 2020 By Mircea Vasiu

Amazon led Nasdaq 100 higher during the pandemic as the big tech companies in the United States benefited from a change in consumer behavior. As people around the world were forced to stay home more, the consumption of online goods and services increased exponentially.

Amazon share’s price reached all-time highs, trading well above the $3,000 mark. It was recently revealed that Softbank, the world’s largest investor in technology companies, was behind the summer rally in the tech stocks as it bought massive amounts of call options.

Yet the rise of Amazon is not something new. The company changed the way deliveries are handled and run businesses far beyond the main online store everyone is familiar with.

What Next for Amazon?

Above $3,000, amazon trades at valuations that do not make sense. Retail traders were credited with the sharp rise of Amazon as fractional share investing allows people to invest as little as $1 in a company’s share without being forced to buy a full share. The concept had a tremendous appeal among retail traders and is considered one of the reasons why the stock market in the United States recovered from the March 2020 dip.

However Amazon still has a wild card on its hand. Apple and Tesla recently announced a split of their share price. As a result, demand for shares increased even more, as more people were able to buy a full share. This goes in sharp contrast with financial principles, as more shares normally dilute the value, but this is 2020. Nothing should come as a surprise anymore.

The last time Amazon announced a split was two decades ago. Since then, the company has stretched its arms into areas that have nothing to do with the online store. For instance, the cloud services business, the AWS, is responsible for double-digit growth in the last year and disrupted the way businesses functioned.

Amazon’s net sales increased 40% in the second quarter, operating cash flow jumped by 42% while net income almost doubled. Such numbers are difficult to beat moving forward, especially because of competition increases.

Walmart announced a subscription-based delivery service, just like Amazon Prime. While it is expected to bite from Amazon’s revenues, Amazon Prime clients’ base will likely remain stable.

AWS also faces tough competition from similar services offered by Google or Microsoft. The Microsoft cloud business, the Azure, exploded recently, affecting AWS’s contribution to Amazon’s bottom line.

But if history is telling us something, this is a company with a full potential ahead. It diversified so many areas that one never knows what the next AWS will be.

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