Another day’s worth of tweets by President Donald Trump attacking Amazon (AMZN) and another day of losses for the stock. At 3 p.m. Monday New York time Amazon shares were down another 5.21% (in the midst of a meltdown in the technology sector, I’d note, so the president doesn’t get all the credit/blame). At $1371 the stock is now below its 50-day moving average at $1471. The 200-day moving average kicks in at $1158. Which means support at that level is another 200 points–or 15%–away.
Clearly the President’s rhetoric has more short-term than long-term effects on the stock. But I don’t dismiss the President’s complaints as simply rhetoric. There are things that he can–and cannot do–to back up his words that would hurt Amazon’s share price and the portfolio of investors who own the stock. (Which is still up 17.05% year to date, I’d note.)
First, absent a major revision of the country’s anti-trust laws the President’s complaints about Amazon being a monopoly and not playing on a level-playing field aren’t likely to go anywhere. (And the idea that this Congress would be able to muster the energy and the will to revise anti-trust law is hilarious.) Amazon is indeed an online commerce behemoth, accounting for 44% of all online sales in 2017. But remember that percentage includes all the third-party merchants who sell through Amazon. And that online sales were still just 4% of all U.S. retail sales in 2017. Amazon’s private brand business is growing fast and someday it might be possible to build an anti-trust case against Amazon if you could prove that it favored its own brands in ways that constituted unfair competition. And someday Amazon might be vulnerable on its advertising and marketing practices if somebody gathered data that showed Amazon favoring some retailers (or itself) over others through hidden kickbacks. But at the moment, the anti-trust case against Amazon is that it’s big and getting bigger and that isn’t by itself grounds for a Justice Department case. (That doesn’t mean that the Justice Department couldn’t launch an anti-trust investigation of Amazon on the President’s orders. Just that I don’t see the grounds for the successful prosecution of such a case now.)
Second, I take the President’s charge that Amazon is getting a taxpayer subsidy in the form of unfairly below market shipping rates more seriously. This is am area where the Trump administration is in a position to hurt Amazon. Not mind you because the President’s case has merit, but because Amazon’s contract with the U.S. Postal Service comes up for renewal soon and the USPS isn’t immune to administration pressure. As best as anyone can figure, the USPS makes money on its package service with Amazon. I say, “as best as anyone can figure” because the contracts between the USPS and costumers are private, because (thanks to Congress) a huge hunk of the USPS “cost” is the requirement that the USPS put aside cash now for 75 years of healthcare benefits for future retirees, and because Amazon presorts its packages and relies on the USPS for the last mile to customers, making comparisons with FedEx and UPS difficult. The USPS says that its contract with Amazon makes money; I think that’s true. Package delivery is the only part of USPS that does make money. The frequently cited number from Citigroup saying that the USPS rates for Amazon lose money and comparing rates for USPS to FedEx and UPS include those costs for future healthcare that aren’t part of the figuring costs for other providers. None of this is to say, however, that Amazon isn’t getting a bargain–Citigroup estimated that the rates it pays the USPS should climb by 40% to match private company rates, which would cost the company $2.6 billion. And with 40% of Amazon’s packages traveling by USPS the company is certainly vulnerable to tougher negotiations with the USPS when the current contract comes up for renewal in–ready–October 2018. Think there won’t be pressure on the USPS to raise rates that Amazon pays? Just by the way, Amazon’s net income in 2017 came to $3.03 billion.
Third, Amazon’s cloud services business is vulnerable to Trump Administration pressure over what companies get lucrative government contracts to shift Defense Department systems to the cloud. Back in February the Defense Department awarded a $950 million, five-year contract to a Herndon, Va.-based company called Rean Cloud to migrate the systems of the U.S. Transportation Command and other defense agencies to the cloud. Real Cloud isn’t owned by Amazon but it does market itself as an Amazon partner That contract set off a round of complaints from Amazon competitors such as Oracle (ORCL) who fear that this contract will give Amazon a leg up on future and much bigger contracts to move the entire Defense Department information infrastructure to the cloud. The Defense Department has made it a priority to move to the cloud but it has not yet announced its plans for open competition for this work. Which does lead to the question, asked by Amazon competitors but not therefore without importance, of why the Pentagon awarded this first contract to Real Cloud before the full plan was in place. Again this seems to be place where Amazon is vulnerable to political pressure. That’s not an insignificant issue given that cloud services are the fastest growing profit center at Amazon.
Fourth, the President has attacked Amazon for not paying sales taxes. Truth is that Amazon does collect sales tax–and has since 2017–for its own sales in all states with sales taxes. The company leaves it up to third-party sellers on Amazon to collect sales taxes on their own. And many of them don’t. They should. And more will now that the White House has focused attention on the area. But I don’t see this as a big deal for Amazon itself.
It legitimately makes traders and investors nervous when the President of the United States attacks a company. And it’s understandable that Amazon’s share price has tumbled under the White House Twitter attacks. It’s hard to put a value on the potential damage from those attacks but as I’ve noted above Amazon does have vulnerabilities on its shipping costs and government contracts for cloud services. None of this, I’d note, really challenges Amazon’s business model or the factors behind its growth–while it does, potentially challenge the company’s near-term profitability.
I continue to hold the stock in my long-term 50 stocks portfolio. (And, full disclosure, I hold Amazon shares in my personal portfolio.) I don’t know how far the stock will fall in what is now a full fledged retest of the February 8 low. There’s a good chance this test will fall. The February 8 low on the S&P 500 is at 2581 and today the S&P 500 closed at 2581.88. (Those skeptical of the value of technical analysis might note.) Under these circumstances I might look for the 200-day moving average on Amazon at $1158–that’s another 15% below today’s close–before thinking I had a irresistible bargain in the stock.