Growing 800 Pound Gorilla Loses its Biggest Edge
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My Samsung Nexus's screen is too small to comfortably watch shows while riding the stationary bike at the gym. My lap-top, too cumbersome and large. This is what put me in the market for a tablet.
Apple's (NASDAQ: AAPL) iPad Mini at $329 is too expensive compared to the competition, especially since I'm not already part of the Apple ecosystem. At $199, this left the Google (NASDAQ: GOOG) Nexus 7 and the Amazon (NASDAQ: AMZN) Kindle for a price conscious shopper like myself. As my Android phone can perform most, if not all, the same functions that the tablet can, my primary purpose would be consumption of content (books and movies.)
The reviews said the clear winner in this battle would be the Kindle, and though the apps available for it pale in comparison to Apple and Google, as I mentioned, this wasn’t the deciding factor in my decision. Additionally, as an existing Amazon Prime member I get free two day shipping, not to mention that I won’t be paying sales taxes like I would for the Nexus 7.
Log into Amazon, add the Kindle to my cart, go to check out. What’s this?! Sales tax included in my order! Must be a mistake.
Nope. Taxes, which along with not supplying the wall charger (an extra $10) made the order more expensive than the Nexus. I logged off, and seriously reconsidered, only completing my order when I remembered that I would be getting a free Kindle book every month that I would otherwise pay for, which over the course of two years would hopefully pay for the purchase in itself.
How This Changes Things
Amazon, for the last 16 years, has had a serious competitive advantage in not having to collect sales taxes, thus being able to sell an identical product for the same sticker price, but actually charging the consumer less. It was a large part of the reason I, and others I know, have shopped there for years. If the same item is $19.05 at Walmart.com and $19.99 at Amazon, if sales tax in your state is more than 5%, buying from Wal-Mart’s (NYSE: WMT) online site was (past tense) actually more expensive.
Amazon CEO Jeff Bezos did all he could to hold onto a 1992 Supreme Court ruling which said that “mail-order merchants did not have to collect tax in states where they did not have physical operations.”
Quoting from this article: "Amazon executives maintained that the sales tax exemption was not much of an advantage. Its regulatory filings told a different story, noting that collecting taxes could 'decrease our ability to compete.' "
I personally hate all the BS and political posturing people/ companies/ politicians take on such obvious issues. Amazon has been saying this for years, and it is complete horse manure. Just take a look at those who behave as I do in terms of price sensitivity. The sales tax charged nearly made me cancel my order. This was a HUGE competitive advantage for Amazon, and they are rapidly losing it. (state by state)
To be sure, aside of initially getting e-commerce off the ground, this has been a completely unfair competitive advantage for Amazon. You can hear the bubbly being popped at the headquarters of Wal-Mart, Target, Best Buy, and other retailers.
To be sure, Jeff Bezos played hardball with this advantage for as long as he could.
To counter, Amazon has begun opening massive warehouses in states where it didn’t have a physical presence, hoping to get consumers their orders faster, perhaps even the same day. Smart, but I generally don't intend waiting a couple days for a substantially lower price ...
Bottom Line for Share Price
This is one of those moments that Wall Street should have factored in this inevitability into the price of the stock, but with the shares trading only 10% off all-time highs, I believe this might be a moment of inefficiency in the market.
At some point, Amazon has to start reaping profits for shareholders to justify its 3,000 PE ratio. I admire Jeff Bezos, his forward thinking, his re-investment of profits into projects that will bring in future and further earnings, but with margins just over 1%, there isn’t a lot of room to maneuver price wise, and taking away this team’s star player from a consumer standpoint (tax advantages) makes me, and for certain others, a lot less likely to buy tickets to Amazon home games.
I forsee Amazon's future sales suffering accordingly and recommend investors take whatever profits they have off the table at this point. In the meantime, I’ll enjoy my free Kindle books.
margiecfl has positions in Google, Apple, and Wal-Mart. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, 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.If you have questions about this post or the Fool’s blog network, click here for information.