Amazon.com, Inc. (NASDAQ:AMZN) stock settled in for a second consecutive day of declines on Thursday following President Trump’s latest tweet about the online retailer. It seemed to confirm what we heard earlier this week, which was that the president was said to be “obsessed” with Amazon. However, analysts have been quick to try to calm investor fears for Amazon stock by saying there’s little the U.S. government could really do to cause problems for the company.
Regulatory risks start to weigh on Amazon stock, thanks to Trump
Amazon stock was a heavy weight on the S&P 500’s consumer discretionary sector on Thursday, as the company accounts for roughly 20% of the sector’s market capitalization. Deutsche Bank analyst Lloyd Walmsley said in a note this week that the regulatory risks related to Trump’s views of the company are mostly just headline risks for Amazon stock with no real impact on the company’s business. In fact, he called the concerns “significantly less concerning for investors” than the data concerns fellow FANG constituent Facebook is dealing with.
Among the potential issues that were raised are antitrust concerns, sales tax and potential problems pertaining to the U.S. Postal Service. Walmsley said it didn’t surprise him that Amazon stock plunged on the back of these concerns because of what’s happening to Facebook in connection with the Cambridge Analytica data scandal. He does see “some small risk” that President Trump could criticize the online retailer using “the bully pulpit” and possibly even place some roadblocks in its way.
However, he emphasized that the company isn’t as fragile as Facebook is right now because he thinks it would be very difficult for the Trump administration to really change anything for Amazon. As a result, he sees Trump’s latest tweet as nothing more than a distraction that’s been amplified by what’s happening to Facebook. He sees the recent pullback in Amazon stock as a buying opportunity and maintains his Buy rating and $1,650 price target.
Here’s what Trump could and can’t do
So just what could the Trump administration really do to Amazon? Bank of America Merrill Lynch analyst Justin Post outlined the possibilities in his own note on Amazon stock. He agrees that Facebook’s problems are amplifying concerns for Amazon regarding what’s actually an old debate that’s been reignited, and he explained what Trump might actually be able to do to the company and why none of the options pose any real threat.
One potential strategy for targeting Amazon is forcing all third-party sellers to collect sales tax or creating other “tax schemes.” Trump has repeatedly taken issue with the company over sales tax, although the company does collect tax on the items it sells itself. Several experts have said that what Trump must be referring to are all the third-party sellers that don’t collect sales tax when they ship items across state lines.
Post doesn’t see any real risk from any changes in sales tax. In fact, he said a change might hurt smaller third-party sellers more than Amazon itself. Although the Trump administration could create some kind of “special Amazon sales tax,” but it would be difficult to get that past potential legal challenges and consumers would probably resist.
Another option is to increase the shipping fees Amazon pays for USPS deliveries. Post doesn’t know what percentage of the company’s shipments are sent via the USPS, but he thinks the company could offset higher fees by simply shifting these volumes to other shippers or speeding up its plan for fulfillment infrastructure construction.
He also suggests that the government could attempt to regulate the online retailer’s third-party seller structure. Sellers pay fees to sell their goods on Amazon, and the online retailer recently added advertising fees. Because of the company’s extremely high share of the online sales market, the government might be able to argue that third-party sales must be regulated, but Post also notes that Amazon’s retail margins remain low, which might hurt the argument.
Finally, he suggests that the government could attempt to force a separation between the company’s cloud and retail businesses by arguing that the cloud business is supporting a losing retail business. He notes that Amazon’s domestic retail business is profitable, but international losses have been climbing and are expected to more than offset domestic profits. In any case, Post thinks a forced separation is unlikely.
Amazon stock slipped by about 1% in early trading on Thursday, falling as low as $1,365.20 per share.