Amazon's Most Important Event Comes The Week After Earnings

| About:, Inc. (AMZN)


There are reasons for near-term optimism when Amazon reports 2Q14 earnings after hours on Thursday.

However, a likely move by the Senate and its Majority Leader, Harry Reid, is of far greater long-term importance.

This action has the potential to break a long-standing correlation in the price of AMZN shares.

Author UpdateDec. 12, 2014, 2:02 AMThe ban on internet taxes is being extended (again) rather than coupled with the MFA, so that bill is officially dead, at least until next year at which point the process would have to start all over again with a Republican majority in both houses. That in turn means that online retailers are likely to continue to have an unfair advantage over their local competitors until some sort of broader tax reform is addressed.

Amazon (NASDAQ:AMZN) has scheduled its 2Q14 earnings report to be released immediately after the closing bell on Thursday, July 24th. Consensus is for revenue of $19.34b, and the conference call will be webcast through Investor Relations at 5 pm. Although the company is expected to lose 14.6 cents per share, I have previously documented how AMZN stock typically ignores profitability and trades based on revenue, resulting in a fairly strong gravitation toward a P/S (price to sales) ratio of 2. Consensus for 3Q revenue guidance is 20.84b. If Amazon meets and affirms consensus, that would imply a $372 price tag for AMZN shares, as shown below:

(4Q13 + 1Q14 + 2Q14 + 3Q14) = 1yr Rev x PS ratio / Shares = share price
25.59 19.74 19.34 20.84 85.51 2 .46 $371.78

However an action by Senate Majority Leader Harry Reid is likely to occur shortly after the earnings report, and I believe it is of greater importance to Amazon and other online retailers. In short, the Senate has combined the stalled Marketplace Fairness Act with the Permanent Internet Tax Freedom Act, which has already passed the House of Representatives. PIFTA is a very popular measure which would make the moratorium on taxing Internet services permanent, thus preventing add-on charges of the sort that are so common on phone bills from appearing on the bill provided by your Internet service provider. The current moratorium expires on Nov. 1 and mid-term elections are looming shortly after that. Thus, it's widely predicted that the combined bill will be voted on before Congress recesses at the end of the month, since Congress will be in session very little after that.

One of the greatest advantages fueling Amazon revenue growth over the years has been the ease with which many customers can avoid paying sales tax, resulting in an inherent price advantage over "brick and mortar" retailers in many states. To quote Fortune,

It's no exaggeration to say you can't fully appreciate the rise of Amazon without understanding this fight.

The MFA is an attempt to level the playing field, but it has been stalled in the house for over a year, after easily (69-27) passing the Senate on May 6, 2013. Despite being required to lobby for action at the federal level by a settlement with California, Amazon has fought collecting taxes tooth and nail. Reid has the power to bring any bill to the floor for a vote, but will only do so in this case if he believes it will pass. Since this is now probably the only way that PIFTA will be made law, bipartisan support is gathering.

In the meantime, the online tax advantage has already been eroding in recent years, and is currently a morass of state laws, often with unclear enforceability. Amazon has been forced to collect sales tax in at least 8 states (Arizona, Kansas, Kentucky, New York, Pennsylvania, South Dakota, Texas, and Washington) and may add up to 7 more this year (Connecticut, Indiana, Massachusetts, Nevada, New Jersey, Virginia, and Tennessee) with no end in sight. The path forward is anything but clear, as is the near-term impact. Nonetheless Amazon investors should watch carefully, as I believe passage of the MFA could signal the beginning of the end of the P/S correlation that AMZN has held for years.

Of course, Amazon has expanded far beyond its retail roots, but those roots still dominate its income. My previous article predicted and subsequently discussed the impact of the price hikes in the Amazon Prime program, as well the (lack of) potential of in its web services. Since Amazon is one of the more opaque companies there is, in terms of financial reporting, it's difficult to quantify the effects of these efforts. Nonetheless, I think the Prime hikes have been well accepted and will act as a near term positive factor. Amazon's technology initiatives are another matter, though. Jeff Bezos has done a good job selling to both customers and investors. The latter group should take care not to discount important outside factors that will affect the long-term strategies he propounds.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.