This Is A Top Reason To Sell Amazon Stock

The Amazon Maven is certainly not bearish on AMZN shares. But here is one factor that would probably top the devil’s advocate list of reasons to sell the stock.
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First, let me be clear: I am not an Amazon stock  (AMZN) - Get Report bear – quite the opposite, in fact. The Amazon Maven argued, a couple of weeks ago, that shares of the cloud and e-commerce giant can reasonably outperform Apple stock  (AAPL) - Get Report through 2025, let alone the broad market.

But if I could rank reasons to sell Amazon shares, at the top of my list would be regulatory control (or attempt to control) Amazon’s business. On Monday, July 12, investors had a taste of what stringent regulation could mean for the Seattle-based company.

Figure 1: Amazon's building in Seattle, WA.

Figure 1: Amazon's building in Seattle, WA.

(Read more from Amazon Maven: AMZN: Sprinting Ahead Of The S&P 500)

Taxes and M&A

Over the weekend, news broke of “a historic agreement on a more stable and fairer international tax architecture” reached by the G20 group of developed countries. The idea: to implement a global minimum corporate tax of at least 15% as early as 2023.

The chart below shows that Amazon’s tax rate (blue line) has fluctuated between nearly zero and 22% since the start of 2018, for an average of around 10%. Meanwhile, after-tax income has skyrocketed. Clearly, a global tax of 15% or more would not only impact Amazon – it is probably geared towards it.

Figure 2: AMZN tax rate vs. Income after tax.

Figure 2: AMZN tax rate vs. Income after tax.

Over the same weekend, the Federal Trade Commission began to probe Amazon’s $8.5 billion acquisition of MGM studios, announced in May. This is yet another chapter in the antitrust saga again US-based Big Tech companies, which seems to have support across the political spectrum.

It is interesting to note that neither MGM nor Amazon have a position of dominance within content production and distribution. Alphabet’s YouTube is the king of streaming video, while the number of Netflix’s monthly average users was about three times larger than Amazon Prime’s in 2019.

It is hard to deny that regulatory scrutiny in this case is at least partially motivated by politics – virtue signaling of sorts that may serve largely as a warning to Big Tech on large M&A deals.

Fundamentals look good

Other than based on valuations, it is nearly impossible to make a bearish argument on AMZN. This may be why, on Wall Street, every single analyst holds a buy or strong buy rating on the stock. Even the lowest price target is above the current share price.

E-commerce has been on fire, even months after the peak of the COVID-19 crisis that sent quarantined consumers to their mobile devices to shop. Within this white-hot corner of retail, Amazon is arguably the most likely candidate to dominate the market. And on the cloud side, things do not look much different for the company.

Therefore, I believe that business fundamentals alone justify confidence in Amazon stock. However, external forces like regulatory scrutiny may be a factor in dragging down the share price, something that investors should keep in mind and factor into expectations.

(Read more from the Amazon Maven: Amazon Stock Zips To New Highs: Revisiting The Bull Case)

Twitter speaks

A proposed minimum global corporate tax and scrutiny around the acquisition of MGM: which of the two, if any, makes you concerned about investing in Amazon stock?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)