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Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The reintroduction of legislation that would enforce states to collect sales tax from internet retailers - called The Marketplace Fairness Act is back. On the top, it seems favorable for brick and mortar retailers like Best Buy or Wal-Mart and bad news for internet retailers like eBay or Amazon. Interestingly, many online giants such as Amazon.com (NASDAQ: AMZN), Barnes & Noble (NYSE: BKS), J.C. Penney, and Home Depot are actually in favor of the tax. And the main organizations that oppose it are eBay (NASDAQ: EBAY) and the Heritage Foundation. There can be a couple of reasons why these online retailers are supporting it. One, it is an additional amount which will be charged from the consumer. And ultimately, the effects of this cost are to be borne by the end-consumer. Secondly, the online retailers via this Act actually get benefitted with the permission to deploy warehouses in those states where tax is imposed. This will cut down their shipping cost drastically. Whatsoever be the case, I don’t think this regulation is going to make any impact on the topline of these retailers.
In this article, I have screened three online retailers from above and analyzed them on the long-term investing landscape. I see two of them offering an excellent investing opportunity for the year ahead. Let’s discuss them in detail.
eBay: PayPal is paying off
The result declaration in mid January, 2013 has surged the stock of eBay by around 7%. The prime driver of the strong quarterly result was the 18% growth in revenue. The continuous global expansion of PayPal was also evident in the quarter as registered accounts reached around 123 million.
PayPal added around 2 million accounts in the quarter and had revenue growth of around 24%. This was mainly driven by continuous adoption of PayPal by consumers and merchants. The geographical expansion of the facility further aided this growth. Additionally, because of the increase in tablet and smartphone users, the volume of mobile payment in 2012 has increased by around 250% year-over-year. But the story doesn't end there, PayPal is not stopping just at the online payment services, it's going offline with its point-of-sale initiative this April. eBay has announced that it has underwent an agreement with 23 large retailers to take part in the initiative. Now PayPal can be used for payment in around 18,000 stores all across the country. The large retailers include RadioShack and Dollar General.
To increase the reach of its offline payment, it has collaborated with Gilbarco Veeder-Root, a payment and point of sale solution provider for stores and gas stations. PayPal's digital wallet will now form part of Gilbarco's machines. Gilbarco serves some of the big names in the retail industry. This deal follows the deals with Ingenico and Discover Financial Services helping the company to expand its horizon in offline payment market as well.
Considering the growth opportunities in the offline payment market for PayPal and the initiatives taken by the company to capture the same, the stock's future should be as secure with the services it offers. For me the stock is a Buy.
Amazon.com: Will Amazon keep up the gross margin gap?
Amazon reported its 4Q12 result with total growth in revenue of 22% year over year. The total revenue for the quarter came in at $21.27 billion which was below the consensus of $22.26 billion. But the gross margin expanded to 24%, nearly 350 basis points higher than last year's fourth quarter. The expansion in gross margin is mainly because of three reasons- increased third-party unit sales, lower transportation cost and growth in Amazon Web Services (AWS).
The factors that helped the company to increase its gross margin can be useful in the future as well. In the last quarter, the sale of third-party units rose around 40% as compared to 25% growth in sales of Amazon's own products. The rise in third-party sales contributed 39% to overall paid units up from the previous year's 36%. Third-party units may not carry the same level of leverage on revenue as Amazon's own products, but they are more profitable hence provide a better margin. Looking at the last two years and the profitability factor of sales of third-party units, the shift should continue in the coming quarters as well and help the company's gross margins.
Taking up the lower transportation cost, Amazon operates roughly 90 fulfillment centers globally, up from last year’s 70. The proximity of these facilities to customers provides reduced transportation costs. The recent announcement of three new fulfillment centers in Texas and one in California underlines the company's commitment to opening more of such centers in future. The increase in the total number of fulfillment centers should offer a reduced transportation cost in the future as well.
The increased gross margin of the company helps me maintain a view of long-term profitability for its stock; hence I recommend a buy for it.
Barnes & Noble: Nook losing popularity and physical stores losing count
This online retailer is going to face headwinds both in the near-term and far-term future. The declaration of its guidance for an expected loss in its Nook segment followed by the less than expected holiday season sale and the announcement of downsizing its physical operations creates some concern about the stock.
In 2013, Barnes & Noble expects its a deeper loss from its Nook Segment compared to last year. The lower than expected sales from the segment should be responsible for the loss. In the last three months of 2012, B&N lost more than 50% of its share in the tablet market. The Nook is losing popularity, and this is evident from the fall of 12.6% year-over-year in tablet revenue for the holiday season. The Nook segment was supposed to help the company in the losses in future from the otherwise shaky physical store segment. Because of cannibalization of physical books by the digital ones, many retailers are downsizing their operations including Barnes & Noble. In the next 10 years the company could close about one-third of its physical locations. On an average, the company can close 20 stores every year to reduce its operations from the current 689 physical locations to only about 500. Additionally, the sale of its retail segment from the nine-week long holiday season that ended on December, 2012 fell by 11% year-over-year because of closing of stores and low online sale.
The Nook tablets are gradually losing their popularity and with thickening competition from products like Kindle Fire, Ipad Mini, Surface etc., the road for both the stock and the tablet is rough. With all the downsizing and weak performance of Nook tablets, I am not very optimistic about the stock. In a long-term, the stock for me is a Sell.
What these online retailers have to offer?
Summing up I can say, that the sales tax on online retailing can take away some share of the advantage they have over physical stores. But the overall cost benefit which the online retailers have over brick-and-mortar businesses cannot be challenged. eBay's initiative of taking PayPal offline and its strategy to expand the coverage to more than 18,000 physical stores should help the company to increase its profitability. The increasing incline of Amazon.com towards more profitable third-party unit sales and increasing count of fulfillment centers should be able to maintain the increased gross margin of the company. I'll recommend both eBay and Amazon as a Buy. As for Barnes & Nobles Incorporated, the future is foggy. With Nook losing popularity and the company's plans to close one-third of its physical stores, the stock seems a Sell.
madhudube has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. 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!