Trading Desk: Amazon Is The Weak Link In The Consumer Economy

How fast the world changes. Amazon (AMZN) is no longer the juggernaut transforming the consumer economy. As the post-Bezos management team scrambles to close warehouses, it’s increasingly clear that the retail engine driving the company’s growth has stalled.

This is more than an intuition derived from decades watching AMZN. Last quarter, its flip from profit to loss cost the entire consumer sector a staggering 29 percentage points of growth . . . and while efforts to cut costs will almost certainly get cash flowing again, we aren’t likely to see real earnings expansion here before at leas 2023.

Until then, mighty AMZN is a net drag on the sector. Give that a moment to digest. All the conventional retailers and manufacturers that felt this company’s competitive threat in recent years are collectively doing better than it is.

As a result, I’ve toyed with the notion of building a smarter consumer portfolio that leaves AMZN out. As you know, it’s a massive stock, weighing in at a full 22% of the sector by market capitalization.

In light of that vast footprint and its fundamental malaise, it’s logical to assume that the “ex Amazon” sector would have held up much better this year, right? Sad to say, not so much.

The sector as a whole is down 26% YTD on a market-weight basis. AMZN is down 25%. The “drag” has actually outperformed its peers through this bear market cycle . . . evidently the giant still has fans who believe the stock can achieve the impossible.

And maybe it can. That’s between you and your fervor for the post-Bezos team’s ability to work miracles with cloud computing, streaming video and all the other businesses that have evolved around the essential Amazon Prime ecosystem.

All I know for a fact is that the retail side has made too many sacrifices to win incremental sales . . . without bankrupting brick-and-mortar rivals. WMT is still here. TGT is still here. COST is still here. They aren’t going away.

And while they’re hurting, so is AMZN. I wouldn’t be surprised to see earnings for the current quarter down 30% from last year’s level, which is triple the shrinkage WMT is on track to report and a little worse than what even TGT has steeled us to expect.

Aren’t these supposed to be the weak links of the retail economy? Evidently their management teams have learned to let the giant waste its resources while they focus on running the biggest operations they can . . . without sacrificing margins.

Wall Street hasn’t really grappled with that fact yet. When it does, we’ll see my theoretical “ex Amazon” consumer stocks outperform, no matter what happens to the giant in the room.

That said, the consumer economy as a whole is not exactly hot stuff right now. I’d rather be in oil or more dynamic areas of the tech sector . . . stocks that can follow the kind of disruptive trajectory that took AMZN from start-up bookstore to trillion-dollar titan in the first place.

After all, while consumer stocks would be basking in 11% year-over-year growth if not for AMZN’s gigantic shadow, there’s another giant distorting the numbers in the other direction. I’m talking about Tesla (TSLA).

Tesla reported 84% earnings growth last quarter. That’s enough to balance Amazon’s drag.

Factor out these two stocks and the consumer sector is at best tracking a little below where it was a year ago in terms of profitability. And while TSLA has been a net positive in terms of earnings growth, the stock has been a net drag in terms of YTD performance.

Run the numbers: TSLA is the only reason to own the consumer sector right now. As long as that’s true, this is where the heat is.