Regulatory Risk Could Open Up Buying Opportunity in Amazon

After an up-and-down week following criticisms from President Trump, investors in wide-moat Amazon likely find themselves with greater uncertainty about what, if any, regulatory restrictions the current administration could impose.

This regulatory risk has grabbed headlines the past two weeks, with Trump stating that Amazon is taking unfair advantage of the USPS and pays little or no taxes, and that the Department of Justice should look into potential antitrust cases. We think it is difficult to make an antitrust case given the existence of other large retail players like Walmart.

Potential tax changes are more of an unknown, and we could conceivably see new revenue, or user-based tax structures like recent EU proposals, though this would likely take time to put in place, given the implications for other marketplace business models.

With respect to USPS shipping fees, we've always thought this could be a tangible risk to the Amazon investment story, though not one that would break its model. At this point, we'd say there is nominal risk of increased USPS fees, as any pricing changes could also lead to higher prices for consumers and increased costs for other merchants. Additionally, Amazon still has competitive countermeasures at its disposal, including fulfilling more products through its own logistics infrastructure or threatening to move more jobs overseas.

Despite the headlines, we see increased regulatory oversight as a low-probability event over the near future and see little reason to change our $1,600 fair value estimate. We believe our high uncertainty rating accounts for potential regulatory risks, and continued pressure may create a buying opportunity.