Hidden Risk of Apple and Amazon

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Includes: AAPL, AMZN
by: NakedValue

News flash: Apple Inc. (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) are two of the world's hottest technology stocks. Like all successful companies, each has its share of competitive risks. But Apple, Amazon and other high profile technology companies like Google (NASDAQ:GOOG) could face hidden risks.

Frequently Mentioned Concerns

While Apple's iPhones and iPads are dominant products, there is growing competition. Google's Android software is expected to become the dominant smart phone OS in the near future. Apple created the tablet market and remains the industry leader and standard, but as with any technology, success can be fleeting. Competitors like Research in Motion (RIMM), Samsung (OTC:SSNLF), HP (NYSE:HPQ) and Dell (NASDAQ:DELL) continue to develop iPad alternatives.

Amazon.com is also susceptible to concern. Among other things, the company has done a tremendous job growing domestic and international revenues, but it continues to trade at obscene valuations. AMZN has a trailing P/E of 71.15 and a forward P/E of 40.63 despite operating with a skimpy return on assets of 5.39%. While Amazon has interesting growth opportunities from cloud computing and social media, it's still largely an online retailer. Amazon currently trades with a price/sales of 2.37 while Wal-Mart (NYSE:WMT) has a price/sales of 0.44 and return on assets of 9.09%. Any shift in investor sentiment that leads Amazon to trade closer to its core retail industry valuations could lead to significant downside.

Hidden Risks

While the above-mentioned risks are those most commonly associated with the high-flying companies, there are hidden regulatory and political risks that investors should consider. As Apple and Amazon become more popular, they also become easier targets for politicians and legislatures looking for votes and tax dollars.

On the floor of the US House of Representatives, Illinois representative Jesse Jackson, Jr. blamed Apple's iPad for eliminating US jobs, as reported by Real Clear Politics:

"A few short weeks ago I came to the House floor after having purchased an iPad and said that I happened to believe, Mr. Speaker, that at some point in time this new device, which is now probably responsible for eliminating thousands of American jobs. Now Borders is closing stores because, why do you need to go to Borders anymore? Why do you need to go to Barnes & Noble (NYSE:BKS)? Buy an iPad and download your newspaper, download your book, download your magazine."

While it is unclear what Jesse Jackson, Jr.'s motivations were for his statements, it is clear that the comments have the potential to create an inflammatory perspective against Apple. While there is no serious near-term political risks for Apple, any continuation of this rhetoric could diminish the Apple brand.

Jackson's comments come at a time when Dick Durbin of Illinois is pushing legislation to introduce a wide-reaching Internet sales tax. This obviously has significant ramifications for Amazon.com. The online retailer's main pricing advantage is the result of its low cost structure and legislative tax advantage over brick-and-mortar retailers. Without this tax advantage, the company could struggle, considering its profit margins are only 3.37%.

Still, the introduction of Durbin's Main Street Fairness Act does not guarantee passage. Last year, Durbin's similar push did not reach the floor for vote. What is clear is that the weak government budgets on the federal and municipal levels ensure that interest in an Internet sales tax should grow.

Going Forward

We have talked about Apple in previous articles, including this one. We think Apple's valuation and market position make it an intriguing stock, especially following what may amount to a technically-driven sell-off following an index re-weighting. We believe that Amazon's valuations are rich and tax risks are substantial, but famed investor Julian Robertson is an Amazon bull.

Despite the positive developments among technology heavyweights like Facebook, Amazon.com, Apple and Groupon, investors should pay close attention to the increasing political risks to these companies. While these risks are often difficult to quantify, investors should remember that the Nasdaq's all-time stock high roughly coincided with the United States vs Microsoft (NASDAQ:MSFT), which was filed in May 1998.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, MSFT, WMT over the next 72 hours.

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