Will Big-Time Tech Players Face a Higher Digital Tax in France?
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In a report on Bloomberg TV last week, Matt Miller discussed a rather interesting issue regarding Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), and other digital companies like Amazon.com (NASDAQ: AMZN) and Facebook (NASDAQ: FB), which has been in the news quite a bit recently. In the network's Global Outlook program, Miller discussed how "France is saying that it's going to look into changing its laws next year to potentially block companies like Google and Apple from putting earnings in different European countries to avoid taxes that they would have gotten levied on in France."
Originally appearing on a lengthier print report on Bloomberg itself, Philippe Marini, a senator who heads France's Senate Finance Committee, periphrastically maintains that "[t]axing the digital sector like other industries could generate more than 500 million euros ($648 million) for the French state annually, enabling it to narrow its budget deficit."
Now, it's obvious that France - like the rest of the Eurozone - is being fiscally squeezed, but one can make the case that these pressures are a result of its own indebtedness and willingness to participate the European Economic Area - a classic single market system - not because of malice from Google or Apple.
Consider the following: according to the IMF's latest data, General government gross debt in France comprises just over 86% of its GDP, the seventh worst in Europe. In fact, France is more indebted than nations whom many would consider to be 'peers' more or less, like the UK (82.5%), Germany (81.5%), and even Spain (68.5%).
Even more compelling, it can be argued that "the French don’t understand the very tax system they’ve spent decades building," as Forbes's Tim Worstall discusses. Worstall says that the methods used by companies like Google and Apple are "not loopholes: they are the point and purpose of the system [...] the old national boundaries aren’t supposed to be important any more," adding that the EU's current tax structure gives companies "every right, indeed the system is set up to persuade you to do this, to sell from only one European base into all EU countries."
One particularly important point that Worstall makes is about France's 19.6% value-added tax, which, "on digital goods is paid at point of dispatch, not delivery," meaning that the likes of AAPL, GOOG, FB, AMZN, and any other techies can set up their headquarters in a more tax-friendly country like Ireland, for example. Therefore, Apple and the rest of the crew are well within the realm of legality to continue to use this system to their advantage; to expect corporations to not be profit-maximizers defies basic Economics 101.
While most companies don’t report country-specific sales figures, we do know that approximately 23% of Apple’s revenues are derived from Europe, and 44% of Google’s revenues come from outside of the U.S. and the U.K. combined. Facebook, meanwhile, receives close to 27% of its revenues from Europe, while Amazon only reports ‘International’ revenues, which make up 42% of its proverbial pie.
From an investing standpoint, we wouldn’t recommend making a pure play based on a higher digital tax in France, but there are a few ways to trade this particular group of stocks. Apple and Google both sport below-average forward earnings multiples, with the former trading below 10 times year-ahead EPS. Google, with a forward P/E of 14.9X is slightly more expensive, but still trades at a discount of nearly 50% to its historical norms. When earnings growth is factored into the equation – both are expected to grow EPS between 15-20% over the next five years – we can see that AAPL is the best bet, as its PEG ratio of 0.66 is less than half that of Google (1.38).
Facebook and Amazon are both rather expensive when using the PEG ratio, but it should be mentioned that shares of FB actually trade at 42 times year-ahead earnings. Amazon, though, still trades close to 140 times forward EPS despite the fact that its financials last quarter were far from ideal (see Is eBay a Better Buy Than Amazon?).
While it may seem a little odd comparing a social media company with one that focuses on e-commerce, it’s important to realize Zuckerberg and Co. may have something up their sleeve, at least according to famed tech analyst Gene Munster. In this report, we take a long look at his prediction that Facebook will make "$10 billion in commerce-related revenue by 2015," but it all starts with the ‘Want’ button. Munster says it’s possible that Facebook will “go full force with the 'Want' button" next year, giving users the ability to combine social with shopping.
If pressed to choose two companies out of these four, we’d have to go with Apple and Facebook, as the former is trading at a better valuation than Google, while FB investors are not taking full consideration of the company’s e-commerce potential. Though it’s hard to say exactly how the French tax situation will shake out, we wouldn’t recommend shorting any of tech’s major players in speculation of a law change that may never come.
This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!