The 'Amazon Law' Is The Signal To Sell Far Overpriced Amazon

| About:, Inc. (AMZN), Inc. (NASDAQ:AMZN) is the world's largest and most successful online retailer in terms of revenues. AMZN has revenues of $21.27B in Q4 2012 alone. For FY2012 that figure was $61.09B. This was up 27% from FY2011, although Q4 revenue was up only 22% year over year. However, AMZN was far from the largest retailer in terms of profits. In 2012 AMZN's GAAP net income fell to $97 million for Q4 2012 (or +$0.21 per share) versus $177 million in Q4 2011. This figure is only 0.46% of revenue for Q4 2012. AMZN's net income for FY2012 was -$39 million. In other words it lost money.

From my point of view, sales will be much lower than Q4 2012's for the first three quarters of 2013. However, the expenses of all the new fulfillment centers will decrease very little. It seems likely that the razor thin profit margin of Q4 2012 will turn negative for Q1-Q3 of 2013. Fulfillment, marketing, technology, and content in G&A combined was $4.45B, or 20.9% of sales in Q4. This was up approximately 293 bps year over year in Q4 2012.

The EU recession seems to be worsening. The Euro Area GDP fell by -0.9% year over year in Q4 2012; and in the EU27 the GDP fell by -0.6% year over year. Cyprus is close to default. In Italy for the last year, 1000 businesses have been failing per day. This is over 300,000 businesses on the year, and there are only about 6 million businesses in all in Italy. Not being able to decide on political leadership will not help Italy. Political indecision will not help other countries' confidence in Italy.

Spain has 26.6% unemployment. This is higher even than Greece's 26% unemployment. Spain has huge real estate problems and huge banking problems even after the bank bailouts. Spain had a -10.2% retail sales decrease year over year in December 2012 (Christmas season).

These things will hurt AMZN's sales in those countries. The EU recession will hurt AMZN's sales in most other EU countries. If that wasn't bad enough, important economic data in the US has been worrisome. The Q4 2012 GDP growth was only +0.1%. Subsequently the federal government hiked the payroll taxes by 2.9% of income for the average American. The government heaped further taxes on the rich for capital gains and dividends. It also added a 3.8% ObamaCare tax on the rich on their capital gains. Then at the beginning of March 2013, Obama signed the sequester into effect. All told economic experts think the decreased spending of the sequester coupled with the increased taxes of early January will lead to approximately -2% less GDP growth in 2013. If the Q4 GDP growth of +0.1% is a valid indication, this will mean a US recession in 2013. At the very least the average taxpayer will have 2.9% less income to spend at If AMZN's margins weren't going to be negative already, the above US economic factors will likely push them into the red for the first three quarters of 2013.

Further it appears the Amazon Law will be approved soon by the US Congress. This law will allow states to pursue AMZN for city and state sales taxes for cases in which sales were made to residents of their state (were delivered to an address in their state). Theoretically, state and city residents have already agreed to pay these sales taxes. Therefore there is no strong legal basis on which to oppose new laws that will allow states to pursue these sales taxes. With many states still in dire financial trouble, it is a virtual certainty that they will quickly approve laws to enable them to collect taxes from AMZN once the Amazon Law is passed by the US Congress.

Often the states in the most dire financial trouble are the ones with the highest sales taxes. For instance, California has a 9.08% sales tax. Arizona has a 9.01% tax. New York has an 8.52% tax. Illinois has an 8.22% tax. Tennessee has a 9.44% tax. I could go on; but the point is that many powerful and highly populated states will want to collect nearly 10% of total AMZN revenues in tax. Alternatively, you could look at it as those states adding roughly 10% to the cost of AMZN's goods. Customers will not like this. AMZN will not like it either. Just managing the accounting, etc. for the taxes will be a lot of extra work for AMZN. This will push AMZN's margins further yet into the red.

Even without all of the above extra problems, AMZN's stock price was probably due for a dip. All the above problems mean that AMZN's stock price is likely to fall dramatically.

The two-year chart of AMZN provides some technical direction for this trade.

The slow stochastic sub chart shows that AMZN is near oversold levels. The main chart shows that AMZN has been in a strong uptrend. However, the price line has recently moved sharply below the 50-day SMA. It looks like it will soon challenge the 200-day SMA. Given the fundamentals, especially the extra new impetus of the Amazon Law, AMZN is likely to break through its 200-day SMA to break out of its uptrend. This sharp down move will put it in a downtrend.

AMZN is not currently profitable in the trailing twelve months. It has an FPE for FY2014 (next year) of 70.28. This is getting hard to justify as the differences between it and Wal-Mart (NYSE:WMT) and Google (NASDAQ:GOOG), which is working on Google Shopping Express, are also trying to challenge it on delivery times. Admittedly GOOG is only trying out Google Shopping Express in the Bay Area for now; but it may longer term be a severe challenge to AMZN. GOOG already has a huge number of users. Therefore it will be able to easily steer a lot of traffic to where it wants it.

Comparing these two competitor companies to AMZN, WMT has an FPE of 12.58; and it often already has lower prices than AMZN. New state taxes on AMZN's products will put a crimp in AMZN's sales versus WMT's sales. WMT has a lot of brick and mortar stores; it does not sell solely online. GOOG has an FPE of 15.22. Both of these FPE's are roughly one fifth that of AMZN's FPE. How can you justify paying a five-fold premium for AMZN? I know I can't. AMZN is a SELL. If you are an aggressive trader, you may wish to short AMZN based on this article's thesis. AMZN's stock price could literally fall to one fifth of its current value. More near term it could fall to a good support area of $180 per share as the US heads into recession (or at least into a significant slowdown).

NOTE: Some of the fundamental financial data above is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.