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Despite the pandemic, the e-commerce giant Amazon (NASDAQ: AMZN) succeeded in establishing itself in 2020. Fourth quarter revenue increased 44% year-over-year, resulting in a 77% improvement in operating profit. The annual results are equally impressive as consumers flocked to the online shopping platform while locked in their homes. Against this backdrop, it’s no surprise that Amazon shares have risen more than 60% in the past year.
However, the company has started a shift in parallel with its fourth quarter results. Amazon founder and chief executive for over 27 years, Jeff Bezos, will step down from that post later this year. Thus begins an era where the names “Bezos” and “Amazon” are not so synonymous.
Investors are not sure how to react. Rather than the beats in Q4 sales and earnings that propelled the stock higher (and out of a five-month funk), the stock slipped slightly on Wednesday. The market is still looking for clues as to how new CEO Andy Jassy, who currently serves as head of Amazon Web Services (AWS), might make a difference. After all, the business is more than its cloud computing business. Some may even consider a larger bet like the ETF SPDR S&P 500 (NYSEMKT: SPY) instead of taking a hit on a proven business near being run by an unknown leader.
And for now, it’s probably the best decision most investors can make.
Image source: Getty Images.
A change of guard
It’s difficult to deal with. Most companies are bigger than their CEOs. There are, however, a few exceptions to this premise. Older investors may remember that General Electric was never quite the same after Jack Welch retired. You’re here wouldn’t be what he is today if Elon Musk hadn’t been so determined to revolutionize the automobile. Bezos apparently wanted his company to become the defining name in e-commerce, going through the first lean years when it was not clear that Amazon would ever achieve lasting viability. He’ll be gone soon, so what?
Giving credit where it’s due, Jassy has proven he has a grip on the business that will continue to grow once the surge of COVID-induced online shopping subsides. AWS revenue grew 30% last year, resulting in a 47% improvement in operating profit which it adds to Amazon’s bottom line. This growth reflects the expansion of the division since its inception in 2006, but now in an increasingly competitive cloud computing market as powers like Alphabet and Microsoft keep stepping up their games.
However, Jassy is more than just a cloud guy. While he has less experience with mainstream, mainstream online consumerism than his predecessor, he shows us an affinity for new growth engines. Concrete example: he firmly believes in the potential of video games. Amazon is in the business, but it’s not particularly competitive in a space that will soon be worth $ 200 billion a year. This opportunistic interest suggests that Jassy is more than a technician.
There is something else, however, that should discourage you from getting into Amazon stocks right now.
One of too many unknowns
Bezos’ exit couldn’t be more difficult to time. Society faces a myriad of challenges that have been brewing behind the scenes for years but are now being pushed to the fore in big ways.
Yes, the controversial decision to take down the alternative social networking site Talking from Amazon’s servers is part of it, though those headlines aren’t a hindrance. They are a symptom of a much bigger philosophical problem: How much control should “big tech” have over the operations of the companies it serves? This is an issue that has been raised at the congressional level for years and especially among the Democratic Party that is now in power in Washington DC.
Likewise, antitrust concerns here and abroad continue to circulate.
None of these challenges are insurmountable. But they’re somewhat new to Jassy, even though Bezos remains by his side as the company’s executive chairman.
Of course, the lack of certainty on the regulatory front only exacerbates what is perhaps the greatest risk of owning Amazon stocks right now – investors as a group may simply not want to bet on it. Amazon during this transition period. Highlighting this uncertainty is whether Amazon will be able to maintain its current growth path once the pandemic subsides.
Without being devastating, Wednesday’s slight pullback in response to the impressive quarter is a subtle indication of those doubts. It could take months for the market to restore the kind of confidence it had in Amazon when Bezos was in the driver’s seat.
Keep it in perspective, but don’t ignore the risk
Do not overreact to the warning. Amazon is far from doomed, but there are plenty of changes on the horizon. It tends to work against a stock.
The large market also has its own risks right now, of course. We don’t know exactly how quickly actions could overcome the effects of COVID-19, for example. We do know, however, that fourth-quarter GDP grew by around 4%, while Standard & Poor’s estimates that fourth-quarter profits for the S&P 500 will be about double the levels crunched by the coronaviruses of the second trimester. Based on risk versus reward, an index-based trade is the smarter option of the two at the moment. There is a lot to be said about exactly what you are getting for your money.
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