Tech Stock Themes:, Inc. vs. Microsoft Corporation, Walmart Stores, Inc.

Updated on, Inc. (NASDAQ:AMZN) became a major standout tech theme in 2017, even overshadowing the rest of the FANG names (Facebook, Amazon, Netflix, Google/Alphabet). Most analysts generally agree that the Amazon stock theme will continue, although some include it on their list of 2018 tech stock themes because of its dominance in e-commerce, while others focus on the cloud.

This is a multi-part series on 2018 tech stock themes. Click here for Part 1 On the FANG stocks.

Amazon stock: battle on multiple frontlines

It’s a tale of one stock with two themes, two competitors and two frontlines. Amazon versus Walmart on one hand and versus Microsoft Corporation (NASDAQ:MSFT) on the other. Few companies can handle one massive battle, let alone two wars in two completely different industries, which is probably why investors are so enchanted with Amazon stock.

GBH Insights analyst Daniel Ives included Amazon stock on his list of tech themes because of both battles. He lists the biggest concern for Amazon stock in 2018 as competition: will it be the year Amazon finally gets a dent in its armor?

The so-called “Amazon flywheel” leaves a lot for investors to like: an “iron grip on e-commerce spending”; Prime memberships; Whole Foods and groceries; and more. He feels the broad diversification from e-commerce to the cloud is smart, but he notes that there is an inherent risk in the wide diversification strategy practiced by Amazon as it moves past groceries and into the pharmacy business in 2018.

Looking into the coming year, Amazon is pushing toward further diversification. The company entered the grocery space in a big way by acquiring Whole Foods, and 2018 appears to be the year it gets into the drugstore business.

Amazon versus Microsoft

There’s also the Prime streaming business, which has been going for years and gradually picking up steam along the way. It could even pick up more steam in 2018, as the company recently filed for a trademark for “AmazonTube,” which triggered speculations that the company could be planning a YouTube-like service. More attention is also being paid to Amazon’s digital ad business for 2018, in which it faces two dominant players along yet another major frontline: Facebook and Google.

Analysts generally agree that as a cloud play, Amazon stock is a winner. Ives estimates that Amazon Web Services will grow by more than 40% year over year for 2018 as the shift toward cloud services becomes more and more widespread. He cited the company’s strong momentum driven by “the combination of a secular cloud shift, entrenched leadership position, and recent price cuts.”

He also noted the company that poses the greatest threat in terms of Amazon’s cloud dominance: Microsoft. He describes the competition as a “two horse cloud race,” and he expects it to benefit both companies “disproportionately,” enabling them to state ahead of others such as Cisco Systems, Google, Oracle, Dell/ EMC, and others.

Amazon stock versus Walmart stock

CNBC’s Jim Cramer focused on the Amazon stock theme from an e-commerce point of view, at least in the sense of the faceoff with Walmart. He sees not only the competition between the two in terms of sales, but also in terms of the stock market in light of the tax reform bill, describing the shift as an “out-of-Amazon-into-Walmart trade.”

He notes that on one hand, we have Walmart’s 32% effective tax rate, which will be slashed to 21%, making it a huge beneficiary of tax reform. On the other hand, there is Amazon, which he said pays a relatively small amount of taxes despite its 43% effective tax rate. Walmart has been buying back stock, reducing its outstanding share count and slashing the supply, while Amazon has been issuing more, causing dilution and a glut of outstanding shares.

Because of each companies’ tax profile, Cramer notes that Walmart is expected to be a bigger beneficiary of reform than Amazon, which is why portfolio managers could be rotating out of Amazon and into Walmart. Meanwhile, demand for Walmart stock is rising as supply diminishes, and Amazon stock shifts in the other direction.

However, he’s not saying that it’s time to dump Amazon stock right now. In fact, he said he would buy Amazon stock into weakness.

This is a multi-part series on 2018 tech stock themes. Click here for Part 1 On FANG.

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