Despite the pandemic, the e-commerce giant Amazon (NASDAQ: AMZN) managed to come out on top in 2020. Fourth quarter revenue increased 44% year over year, leading to a 77% improvement in operating revenue. The results for the entire year are as impressive as consumers migrated to the online shopping platform while stuck at home. Given this scenario, it’s no surprise that Amazon’s shares have risen more than 60% in the past year.
The company threw a curved ball in conjunction with its fourth quarter results, however. Amazon founder and chief for more than 27 years, Jeff Bezos, will step down later this year. Thus begins an era in which the names “Bezos” and “Amazon” are not so synonymous.
Investors are not sure how to respond. Rather than fourth-quarter sales and profits hitting the stock catapult upward (and out of a five-month crisis), the shares fell 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), can turn things around. After all, the company is much more than its cloud computing business. Some may even be thinking about a broader bet, like the SPDR S&P 500 ETF (NYSEMKT: SPY) instead of shooting a proven company close to being run by an unknown leader.
And for now, it’s probably the best move that most investors can make.
Image source: Getty Images.
A change of the guard
It is a difficult thing to process. Most companies are bigger than their CEOs. There are some exceptions to this premise, however. Older investors may remember that General electrical it was never the same after Jack Welch retired. Tesla it wouldn’t be what it is today if Elon Musk wasn’t so determined to revolutionize automobiles. Bezos apparently wished his company would become the definitive name in e-commerce, going through its early lean years, when it was unclear that Amazon would ever achieve sustainable viability. He’ll be leaving soon, what now?
Giving credit to those who deserve it, Jassy has proven he has control over the business that will continue to grow once the COVID-induced online shopping boom has cooled. AWS revenue grew 30% last year, leading to a 47% improvement in operating revenue that adds to Amazon’s financial results. This growth reflects the expansion of the division since its inception in 2006, but now within a cloud computing market that is increasingly competitive as powers such as Alphabet and Microsoft keep stepping up your games.
Jassy is more than just a cloud guy, though. While he may have less experience with widespread online frontline consumerism than his predecessor, he is showing us an affinity for new growth engines. Case in point: he believes strongly in the potential of video games. Amazon is in the market, but it is not particularly competitive in the sector that will soon turn over $ 200 billion a year. This opportunistic interest suggests that Jassy is more than a coach.
There is something else, however, that should discourage you from getting into Amazon’s shares yet.
Many unknowns
Bezos’ departure could not be more difficult. The company faces a myriad of challenges that have arisen in the background for years, but are now being pushed to the forefront on a large scale.
Yes, the controversial decision to remove the alternative social networking site Parler from Amazon’s servers is one, although these headlines are not the obstacle. They are a symptom of a much larger philosophical question: how much control should “big technology” have over the operations of the companies it serves? It is an issue that has been questioned at Congress levels for years, especially among the Democratic party that is now in power in Washington DC
In the same vein, antitrust concerns here and abroad continue to circulate.
None of these challenges is insurmountable. But they are new to Jassy, even though Bezos remains at his side as the company’s chief executive.
Of course, the lack of certainty on the regulatory front only exacerbates what is perhaps the biggest risk in owning Amazon shares at this point – investors as a group may simply not be willing to bet on Amazon during this transition period. Underlining this uncertainty is whether or not Amazon will be able to sustain its current growth path, once the pandemic is easing.
While not devastating, Wednesday’s slight retraction in response to the impressive quarter is a subtle indication of these doubts. The market may take months to restore the kind of trust it had with Amazon when Bezos was in charge.
Keep the perspective, but don’t ignore the risk
Do not overreact to the warning. Amazon is far from doomed, but there are many changes on the horizon. This tends to work against an action.
The broad market also has its own risks now, for sure. We don’t know exactly how quickly actions can 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 earnings for the S&P 500 will be about twice the levels reduced by the second quarter coronavirus. On a risk versus reward basis, index-based trading is the smarter option of the two now. There is a lot to be said about what you are gaining from your money.