Just five years ago, e-commerce powerhouse Amazon.com was one of the most feared companies in the world. In June 2017, when it was leaked to be buying the Whole Foods Market grocery chain, retailing stocks plunged, with some grocery retailers down as much as over 20% in the aftermath. Every time a reporter or an analyst speculated on a new segment that Amazon was looking to enter next, stocks in that sector would be massively sold off. In six years between March 2015 and middle of last year Amazon stock was up over ten-fold. Although the company was barely profitable and its stock was seen as overvalued, Amazon could do no wrong in the eyes of investors.

These days, it seems the e-commerce icon isn’t getting much right. Over the past year, Amazon has been a laggard among big tech stocks. On April 28, Amazon reported a loss of US$3.8 billion ($5.3 billion) — its first quarterly loss in seven years. The e-commerce giant lost US$2 billion during the quarter in costs due to excess capacity, another US$2 billion due to operational inefficiencies and surplus labour and US$2 billion more from higher inflation. Investors hammered its shares. Amazon stock tumbled 24% in April alone — its worst month since the 2008 global financial crisis. This month, Amazon shares are down another 15.4%.

In the January-March quarter, Amazon’s revenues grew a paltry 7% compared to the 44% growth in the year-ago period, in line with similar low growth at social media giant Facebook owner Meta Platform, 9% revenue growth for iPhone maker Apple, 18% revenue growth for software behemoth Microsoft and 23% sales surge for search engine Google’s parent Alphabet Inc. Once the fastest growing of the big tech players, Amazon now has the slowest growth among its peers.

E-commerce stocks tumble

E-commerce — until recently one of the most promising areas of the global digital economy — has been showing clear signs of weakness following two years of incredible gains during the pandemic. As the reopening takes hold, people are more comfortable shopping in malls and grocery stores rather than on their smartphones or laptops. Supply chain bottlenecks have hit Amazon as hard as they have hit physical retailers. Higher fuel prices makes home delivery more expensive. Labour shortages have pushed wage costs higher. There are 5.9 million unemployed people in America and 11.6 million job openings. According to the US Commerce Department, non-durable products — or the things Americans buy on Amazon — were down 0.6% in the last quarter.

Are the days of heady e-commerce growth over, or do players like Amazon still have tailwinds that might propel them to new heights once inflation, interest rate, supply chain worries and the Russia-Ukraine war are in the rearview mirror?

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To understand what’s happening with Amazon, look no further than the e-commerce stock market carnage over the last 18 months. Amazon shares are down 45% from its peak in July last year. Pandemic darling Etsy, which sells handmade or vintage items and craft supplies, has seen its share price slide 76% since November; consumer-to-consumer e-commerce player eBay shares are down 43% from its October highs; and online furniture platform Wayfair shares have tumbled over 84% from its August 2020 peak.

Shares of Chinese e-commerce Alibaba Group Holding have plunged 76% from their late October 2020 peak when its fintech affiliate Ant Group’s Hong Kong IPO was hastily withdrawn on the orders of regulators. Other Chinese online retailers have not fared much better. JD.com is down 55% from its peak in February last year, while shares of China’s No. 3 e-commerce player Pinduoduo have slid 87% from its peak of 15 months ago.

South Korean e-commerce giant Coupang, whose shares popped up to $55 in the week of its IPO in March last year, has seen its shares plunge 82% from its peak, while Latin American online retailer Mercadolibre’s stock is down 68% from its highs in January 2021. Pan-African e-commerce operator Jumia Technologies shares are down 93% from last year’s peak.

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In Southeast Asia, the recently listed Indonesia e-commerce and ride-hailing conglomerate GoTo Gojek Tokopedia shares have fallen 49% from their post-IPO highs of March. Its rival Bukalapak.com, which listed last August, has seen its shares slide 76% from their post IPO peak last August despite a recent rebound. Singapore-based Sea, which owns Shopee, has seen its shares plunge over 84% from a high of $372.70 last October.

Clearly, investors around the world are now unwilling to pay the ridiculous valuations the market once ascribed to e-commerce players. Amazon still trades at 55 times next year’s earnings compared to a market multiple of just under 17 times for the rest of the S&P 500 companies. Aside from Chinese e-commerce firms whose profits have plummeted over the past year, none of the other listed e-commerce firms around the world are likely to turn a profit in the foreseeable future.

Pure-play e-commerce stocks are not the only ones getting hit. Companies that facilitate online shopping are also bearing the brunt of the slump in online shopping. Package delivery players Fedex and United Parcel Service (UPS), as well as e-commerce-focused logistic players GXO Logistics and XPO Logistics have been hit hard as well as firms that own and rent warehouses and fulfilment centres. The stock of global logistics REIT Prologis, which counts Amazon as its largest customer, peaked just two weeks ago but is down 29% since. Ottawa-based global e-commerce enabler Shopify, which helps physical stores transition to a multi-channel strategy by providing them tools to build online shopping platforms, has seen its shares hammered 82% since they peaked last November.

Amazon was the original Internet darling. Jeff Bezos, a former investment banker in New York, uprooted his family and moved to Seattle because he thought he could make bank selling books online. During the dotcom boom, Amazon was the yardstick against which all other Internet players were measured.

After the bubble burst, Amazon stock plunged over 95% to just over US$3.50 a share and the company was literally weeks from bankruptcy. But Bezos persevered, turning the online bookstore into an “Everything Store” — a platform where you can buy everything from the US$10 million-dollar Blossom Dance painting and million-dollar jewellery to cheap toilet paper. Unlike Apple, Microsoft and Google which are truly global players, nearly 70% of Amazon’s business comes from the US.

For nearly a decade now, the key growth driver for Amazon has been not its core e-commerce segment but its cloud infrastructure business, or Amazon Web Services (AWS). AWS reported revenue growth of 37% in the last quarter. AWS also provided over 60% of Amazon’s profits in the last quarter even though it accounts for just 22% of Amazon’s total revenues.

Still, the opportunity for Amazon in the cloud space is huge. UBS expects the global cloud services market to double over the next few years to over US$ 600 billion. If Amazon, currently the far-and-away leader in the cloud space, can maintain something close to its current market share, its cloud services could be an US$200 billion annual business by 2024.

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So, what’s gone wrong at Amazon? Its forte was its ability to focus on the future. It built huge capacity in anticipation of demand. As the pandemic broke in early 2020, the e-commerce powerhouse went on a hiring spree, adding 600,000 workers, most of them in warehousing and fulfilment, over two years. It doubled the size of its warehousing infrastructure during the pandemic years.

Now, as the world opens up and people return to physical stores, malls and supermarkets rather than shopping online, it turns out that Amazon built far too much capacity. It has too many workers, too much warehousing space, too many vans that aren’t filled to the hilt, racing around making urgent home deliveries of things people don’t immediately need.

Amazon once had the best logistics and fulfilment capabilities, and no other online retailer came close. Over the past few years, competitors like Walmart, Costco and Target have built delivery capabilities that are as good as, if not better than Amazon, in some cases.

Moreover, Amazon’s offerings are not always cheap. If you shop for jars of instant coffee from Amazon, Costco and Walmart, you might find Amazon is the most expensive of the lot. Also, it may not have the same variety of coffee available as its rivals. When Amazon was the only online retailer which promised next-day or same-day delivery, customers didn’t mind paying a slight premium. Now that there are other players doing almost as good a job, why pay Amazon more to get exactly the same goods?

Amazon offers free same-day or next-day shipping for its 220 million Prime customers — who get a bunch of movies and TV shows for free — in many of its developed markets. Prime membership fees have increased from US$119 to US$139 a year. That is US$30.8 billion in subscription fees before it has delivered a single item. Subscriptions from Prime as well as Amazon Music make up 7% of Amazon’s total revenues. Over half of all North American households have a Prime membership and over 90% of them say they will not cancel it despite the recent hike.

One recent growth driver for Amazon has been advertising services, which make up another 7% of e-commerce firm’s revenues. Two years ago, Amazon catapulted to become the No. 3 player in advertising behind Google and Meta Platform which owns Facebook, Instagram and WhatsApp. But, growth in ad business, which was 50 to 60% per year before the pandemic, is starting to slow down. Ad revenues in this past quarter grew just 23% y-o-y, a deceleration from the 33% growth in the previous quarter and 52% in July–September 2021.

Last quarter’s results look bad because Amazon had to write down US$7.6 billion on its 20% stake in electric vehicle (EV) start-up Rivian Automotive that listed through a special purpose acquisition company (spac) merger in November. With Rivian stock touching US$179.47 per share in the aftermath of the merger, Amazon’s Rivian stake was valued at US$35.8 billion.

The value of that stake has since been cut to just over US$4 billion as Rivian stock has collapsed. Ford Motors, the other major shareholder in the fledgling EV maker, began selling down its own stake when Rivian’s 180-day post- IPO lockup period expired last week. Unless Rivian shares rebound, Amazon might need to write down US$24 billion on the value of its Rivian stake.

Distractions like investment writedowns aside, Amazon remains a formidable behemoth that other competitors will find hard to keep up with. Amazon is seen as a key beneficiary of digital transformation. It remains laser-focused on slowing down spending and improving margins, which in turn should help improve profitability.

The huge cash flow from its cloud services business will help fund the growth of its other businesses. Amazon continues to invest heavily in warehousing, same-day or next-day home delivery, and building up a big library of entertainment content for the Prime Video service. Just last month, Amazon completed the US$8.5 billion purchase of Hollywood studio MGM, which owns the James Bond movie franchise.

MGM may be the last big purchase that Amazon has ever made. A slowdown like the one world is currently going through, with higher inflation and higher interest rates, is often a boon to established larger players which can take market share and lure talent from weaker rivals. Amazon has talked about expanding into healthcare and robotics, and the Rivian investment was part of its effort to dip its toe into autonomous vehicles. Whether it will grow organically and compete against more nimble players not subjected to similar regulatory pressures remains to be seen.

Assif Shameen is a technology writer based in North America

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