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Can Prime Day Make Amazon Stock Great Again?

09 Jul 2019

After Amazon’s (NASDAQ:AMZN) Prime Day was stung last year by bad reviews and a site outage, AMZN seems determined to make its 2019 clearance sale great again. Of course, the owners of Amazon stock hope that this year’s Prime Day will be great enough to lift AMZN stock.

Last year’s crash, in which visitors were shown pictures of dogs instead of merchandise, has emboldened both online rivals like eBay (NASDAQ:EBAY) and offline rivals like Target (NYSE:TGT) to hold competing events. eBay has even promised to offer extra deals if Amazon crashes again.

Despite its problems AMZN did about $3.6 billion of business during last year’s Prime Day. It sold over 100 million products. It cleared out inventories of its old Echos and Fire sticks. It also added millions of new Prime members, who pay $119 per year to get free shipping and streaming video.

Last year’s event also pushed the market cap of Amazon stock over $900 billion for the first time. AMZN stock closed on Friday with a market cap of $956.5 billion.

Pushing Back
Since last year’s event, AMZN has gotten enormous pushback from politicians, regulators and courts.

The disaster of its HQ2 decision showed Amazon to be out of touch with political reality. Its reversal on that choice only made things worse.

On its 25th birthday, Amazon faces politicians who want to break it up, regulators who are skeptical of every acquisition it considers, and courts that are pouncing on the actions of its third-party merchants.

It’s the last item that’s the biggest threat to Amazon stock. Over half of Amazon’s sales are made on behalf of third parties. Holding AMZN liable for the product failures of third parties will, at minimum, add billions in costs and creates a meaningful overhang on Amazon stock.

Amazon is already fighting fake sellers, fake reviews, and other scams. If it must pay for what legitimate merchants do as well, its growth may disappear.

To raise profits and boost Amazon stock. AMZN has also launched small brands, forced companies to change their packaging, and tried to make grocery brands share Prime Day losses. All this is certain to fuel the growing political threat faced by Amazon stock.

The Show Must Go On
Meanwhile, the Prime Day show goes on.

AMZN is promising deals on kitchenware, dining, fashion and clothing. It has launched a browser extension and a “Prime Hub” page to let shoppers “pounce” on new deals as they appear.

Amazon gets billions of dollars of free publicity from press reports on “the best deals” of Prime Day. The sale also helps it adjusts its inventory levels ahead of the second-half purchasing rush and increases customers’ loyalty.

Target is trying to capture some of that magic with a sale aimed at users of its REDcard.on the same day as Prime Day. Walmart (NYSE:WMT) is also planning to unveil specials on its web site during Prime Day, even as that site continues to rack up losses. Other stores, like Nordstrom (NYSE:JWN), are planning to hold their own summer sales during the same week as Prime Day.

The Bottom Line on Amazon Stock
All the hype masks an uncomfortable reality for the owners of AMZN stock, like me.

The price of Amazon’s stock is no longer dependent on the company’s growth rate. It can’t be. Its growth must slow because bigger numbers are harder to push upward.

Amazon stock is now dependent on the company’s earnings, which have risen so quickly that the price-earnings ratio of AMZN stock is now “just” 80. But Amazon’s profits must keep rising to compensate for its slower growth rate.

Then comes the inevitable question. Will AMZN share those earnings with the owners of Amazon stock? Unlike other companies, which bought back their shares and raised their dividends in the wake of the 2017 tax cut, Amazon has refused to take either of those steps.

With Amazon’s growth slowing, its earnings pressure growing, the government closing in and AMZN refusing to share its profits with investors, maybe the best thing to sell this Prime Day is some Amazon stock.

By Dana Blankenhorn

Source: Investor Place