Friday, March 22, 2013
Amazon (AMZN) is to internet commerce as Wal-Mart is to traditional retailing. Both companies are the alpha dogs in their respective niches and are generally considered sound investments. However, according to David White, there’s quite possibly a perfect storm of circumstances converging right now that should at least cause you to stop and evaluate your position in Amazon.
White explains, “Amazon has revenues of $21.27B in Q4 2012 alone. For FY2012 that figure was $61.09B. This was up 27% from FY2011, although Q4 revenue was up only 22% year over year. However, AMZN was far from the largest retailer in terms of profits. In 2012 AMZN's GAAP net income fell to $97 million for Q4 2012 (or +$0.21 per share) versus $177 million in Q4 2011. This figure is only 0.46% of revenue for Q4 2012. AMZN's net income for FY2012 was -$39 million. In other words it lost money.”
Additionally, the European Union’s recession is getting worse. GDP fell by 0.9% in Q4 2012. Cyprus is on the verge of default. Italy is seeing 1000 businesses fail each day, over 300,000 businesses for the year. Spain and Greece are experiencing unemployment rates of 26% or more. Spain is still experiencing real estate and banking problems and saw a loss of 10.2% in retail sales for the 2012 Christmas season. All of these factors will have a negative impact on Amazon’s future sales in Europe.
In the U.S., the picture doesn’t look any better. As White explains, “The Q4 2012 GDP growth was only +0.1%. Subsequently the federal government hiked the payroll taxes by 2.9% of income for the average American. The government heaped further taxes on the rich for capital gains and dividends. It also added a 3.8% ObamaCare tax on the rich on their capital gains. Then at the beginning of March 2013, Obama signed the sequester into effect. All told economic experts think the decreased spending of the sequester coupled with the increased taxes of early January will lead to approximately -2% less GDP growth in 2013. If the Q4 GDP growth of +0.1% is a valid indication, this will mean a US recession in 2013. At the very least the average taxpayer will have 2.9% less income to spend at Amazon.com. If AMZN's margins weren't going to be negative already, the above US economic factors will likely push them into the red for the first three quarters of 2013.” And the icing on the cake is the expectation that the U.S. congress will soon pass the Amazon Law, giving states the authority to collect taxes on sales made in their state. This is likely to further erode Amazon’s sales and revenue, and consequently profits.
The combined effect of these issues is likely to force Amazon’s stock price to drop. If you own Amazon stock, the question you need to ask yourself now is can you weather that potential storm or is it time to bail? Only time will tell for sure.