Amazon Feels the Pinch on Profit Margins Despite Strong Sales Growth
The holiday season has proved to be a major sales boost to online retail giants Amazon (NASDAQ:AMZN) that have set digital sales records for most of this period. However, high costs have been a major source of investor concern with the company’s shares declining since its Q3 2011 earnings were reported. [1] Further cost burdens could also be on their way, as sales tax might be imposed on Internet retailers like Amazon and eBay (NASDAQ:EBAY) following a push from U.S. senators and smaller local merchants. [2]
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See our full analysis for Amazon’s stock here
Can Media Consumption Offset High Costs?
A quick look at Amazon’s sequential revenue and margins shows the trend that is worrying investors. Revenue is surging through digital and hardware sales such as the massively popular Kindle Fire. However, this growth is coming at the expense of heavy spending from the company, including opening new distribution centers to accommodate expanding demand as well as high promotional costs especially on the Kindle Fire.
Source: Amazon Press Center
This trend is expected to continue with company guidance stating expected Q4 2011 revenues of around $16-$18 billion and margins lying anywhere between -1.2% to +1.3% for the quarter. To make things worse, U.S. senators are fast pushing to enable states to collect sales tax from online retailers, a move that is thoroughly being opposed by the likes of eBay. Surprisingly, Amazon’s reaction to the sales tax issue has been mixed, with the company supporting the move, though subject to certain “provisions”.
It seems that Amazon has 2 motivations behind this move.
Firstly, the company might not want to have a bad relationship with government watchdogs as it is evident that considering its growth Amazon would already be under the purview of several regulatory bodies similar to Google. Secondly, Amazon knows that sales tax will hurt a competitor like eBay to a greater extent, considering that the latter thrives on creating a marketplace exclusively for small sellers and bidders and so it could fare better on a relative basis.
Amazon’s motivation aside, a further taxation is sure to present itself as another cash burden for the company, which now needs to improve on its razor thin margins to see a stock turnaround. We continue to remain bullish on the company and have a price estimate of $233 for Amazon’s stock, which is currently around 34% above the current market price.
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