Amazon (AMZN) has been one of the biggest winners in the stock market on multiple timeframes. Since going public in 1997, the stock is up more than 12,500%. In contrast, the S&P 500 is up 315% over that timeframe.
Despite growing into a company worth more than $1.5 trillion, its outperformance has continued in 2020. YTD, the S&P 500 is 2.5% higher, while Amazon is up 58%.
Notably, AMZN hasn’t fallen to the “law of large numbers.” Previously, many companies have reached extraordinary heights in valuation and eventually hit a point, where they were unable to maintain growth in their core businesses. In the past, many companies that became dominant in one area began moving into new markets and faltered. Other companies started focusing more on returning capital to shareholders through dividends or share buybacks.
Despite Amazon’s size, it has navigated this challenge quite capably. For example, in the second quarter, the S&P 500 had a decline in revenue of 10.3%, while Amazon posted a growth rate of 40%.
One major factor is that AMZN’s two major addressable markets continue to expand in size – E-Commerce and cloud computing. In both of these markets, AMZN has been able to use its size and early-mover advantage to create network effects and economies of scale which results in a superior customer experience.
Further, Amazon’s management has proven itself to be quite agile and adept. It’s been so successful that it’s essentially lapped the competition. In E-Commerce, it has 38% of market share with its closest competitor, Walmart (WMT) at 10.5%. In cloud computing, it has a 33% market share which is equivalent to that of its next three competitors combined.
Increased Regulatory Risk
Amazon has essentially tamed the normal forces which bring down a company. Its competitors are far behind, and it doesn’t seem likely to be a victim of hubris which has been the downfall of many big companies in the past.
Given that the E-Commerce market is expected to triple in size and cloud computing is expected to go from a $100 billion market to $1 trillion over the next decade, it’s easy to understand why many investors believe that Amazon’s ascent is likely to continue.
However, Amazon does face one foe that could meaningfully alter its trajectory – the federal government. The increasing power and influence of mega-cap technology companies have placed it firmly on the government’s radar. Further, it’s one rare area of bipartisan agreement. Some of the potential outcomes are increased regulation, a breakup of the company through forced divestment of certain units, or heavy fines levied against the company.
Recently, the Department of Justice sued Google (GOOG) for violating antitrust laws due to its dominance in the search market. Likely, Amazon is also going to face increased scrutiny in the coming months.
The company has drawn the ire of influential Democrats like Senator Elizabeth Warren and Senator Sherrod Brown who have been outspoken against Amazon’s low tax rate, unsafe conditions at its warehouses, and conflicts between operating a marketplace and selling on it.
Typically, Republicans are opposed to government action against businesses, however, they have become increasingly concerned about the concentration of power in the mega-cap technology companies, especially when it comes to censorship.
Amazon founder and CEO Jeff Bezos have also drawn criticism from Republicans for his ownership of the Washington Post, and it could intensify more with his rumored purchase of CNN. President Trump has also attacked the company repeatedly for these reasons which have increased Amazon’s negative perception among Republicans.
Buy These 3 E-Commerce Stocks Instead
While the election outcome may not be clear for days or weeks, it’s very possible that we have some sort of divided government with the most likely outcome being a Democrat President and Republican Senate.
Even if Democrats eke out a majority in the Senate, a lot of power will be concentrated in the hands of centrist Democrats from states like West Virginia, Montana, North Carolina, and Arizona who have conservative leanings on certain issues. This could mean a continuation of our gridlock environment.
It also increases the chances of action taken towards companies like AMZN, since it’s one area of bipartisan agreement. Since it became a public company, Amazon has been the best stock to play the growth in E-Commerce.
However, due to the risk of increased regulation for Amazon, I believe investors should instead focus on other companies like Alibaba (BABA), Chewy (CHWY), and Etsy (ETSY).
BABA has many similarities to Amazon. Today, its shares are trading 6% lower due to delays in the filing of Ant Group’s IPO. However, given the close relationship between Jack Ma and the Chinese government, it’s likely that these issues will be smoothed out.
For investors, BABA is similar to AMZN in many ways. It’s the dominant E-Commerce and cloud computing company in Asia. It also may have more upside given that populations in these countries are larger, and another billion people in Asia are expected to enter the middle class over the next decade.
Note that BABA is one of 5 stocks in the Reitmeister Total Return portfolio. Learn more here.
In addition to its consumer-based E-Commerce platform, it is also the leader in business to business E-Commerce and has exposure to fintech through Ant Group.
In addition to a more diversified business and upside than AMZN, BABA is cheaper but growing faster with higher margins. Notably, despite its size, it doesn’t face the same type of regulatory risk as AMZN given that the Chinese government is intent on supporting its domestic, tech industry to be a counterweight to US tech dominance.
BABA’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank. Among the 115 stocks in the China industry, it’s ranked #1.
CHWY is an online retailer of pet products. This means it’s at the intersection of two bullish, secular trends – increasing pet ownership and E-Commerce.
Pet ownership is increasing in popularity especially among Millennials and Generation Z. Additionally, spending on pets is expected to increase at a double-digit rate over the next decade.
CHWY is pursuing a strategy like many Internet companies, where it’s winning market share and then offering higher-margin products to its customers like pet insurance and veterinary services. The results have been successful as its stock is up 100% YTD. This winter, it could see another boost from the increased coronavirus case counts.
In its last quarter, CHWY delivered $1.7 billion in sales, 47% year-over-year revenue growth, and a 38% increase in customers. Gross margins also expanded with higher volumes. Throughout its history as a public company, CHWY has been remarkably successful in adding customers and increasing the average order size per customer.
As a result, it’s not a surprise that CHWY is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, and Industry Rank. In the 34-stock Consumer Goods industry, it is ranked #7.
ETSY is similar to CHWY in that it’s beaten AMZN in its niche of handcrafted and vintage items. AMZN launched its marketplace for these types of items, even offering incentives to lure away ETSY’s top sellers, but so far has failed to gain traction.
This is a strong indication that ETSY has successfully created an online marketplace for independent sellers of unique products that have strong brand value and is loved by its users.
Its recent results have been quite impressive. ETSY has benefitted from the pandemic with an influx of buyers and sellers. Another tailwind for ETSY is that many outlets for spending are unavailable, so there is more spending on the household items that ETSY sells. The pandemic and shutdowns have also increased in people upgrading their homes and decor.
In its last quarter, ETSY generated revenue of $429 million, representing a growth of 137% year-over-year. It also reported 60.3 million active buyers, which increased by 41% year-over-year, and 3.1 million active sellers, which increased at 35% year-over-year.
The market expects ETSY’s revenue to increase by 108% for the next quarter and 13.7% next year. The company’s EPS is expected to increase 383.3% for the quarter and more than 57% annually over the next five years.
ETSY’s strong fundamentals are reflected in its POWR Ratings. It has a “Buy” rating with an “A” for Peer Grade and a “B” in Trade Grade and Industry Rank. Within the Internet industry, it’s ranked #10 out of 58 stocks.
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AMZN shares were trading at $3,058.73 per share on Tuesday morning, up $54.25 (+1.81%). Year-to-date, AMZN has gained 65.53%, versus a 6.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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