While the stock market has reacted much better than expected to Donald Trump’s election win, not every stock is basking in the glow of the Donald rally. Most large tech stocks are down, with Amazon.com, Inc. (NASDAQ:AMZN) as a prime example. While the Dow Jones Industrial Average is up a solid 4% since the election, AMZN stock is down 1.5%. And since hitting its 52-week high in early October, the Amazon stock price is down about 12%.
What’s the story here? There are several mixed narratives here, none of which fully makes sense.
Trump, given his views on free trade and immigration, is seen as being dangerous to American tech companies with sprawling overseas empires and a need for skilled immigrant labor. The thinking is that their costs will rise if they are forced to move operations stateside or bid up scarce domestic engineering talent.
But many of these companies also have massive overseas stockpiles of cash and would presumably benefit from Trump’s proposed cut on repatriated profits. The companies would potentially pay just 10% to repatriate their cash versus the prohibitively expensive 35% they pay now.
While this affects Amazon stock less than, say, Apple Inc. (NASDAQ:AAPL), it should mitigate the damage to the tech sector overall.
Trump also threatened antitrust measures against big tech companies, with AMZN stock specifically singled out. My suspicion is that Trump was bluffing. But in the event that he’s not, any antitrust action will take years to play out, and at the rate Amazon is evolving, it will likely be a very different company by then.
AMZN Doesn’t Have to Fear Trump
Furthermore, the government would likely lose its case. It’s hard to argue that Amazon — which has probably done more than any company in 20 years to lower prices for consumers — has used its power to adversely affect consumer choice. So I tend to take the antitrust threat with a large grain of salt.
And finally, there is the personal Trump vs. Bezos narrative. Bezos has been very vocal about his dislike of Trump’s policy proposals, and Trump has gone so far as to accuse Bezos of buying the Washington Post for the purpose of using it as a personal propaganda tool and to fight antitrust action.
Trump has also loudly criticized AMZN for failing to collect sales taxes, believing that this gave the company an unfair pricing advantage over brick-and-mortar rivals. In a high-sales-tax state like Texas and California, brick-and-mortar stores were instantly at a 7.5% to 10% price disadvantage.
But on this front, The Donald is a little behind the times. Due to Amazon’s expanding physical presence and the passing of “AMZN tax” laws in several states, Amazon now collects sales taxes in 29 states accounting for about 84% of the population. So it’s hard to see any new developments here really having much of an impact on Amazon stock.
Of course, AMZN stock’s recent declines aren’t purely due to political issues. Amazon stock had been in decline for the month leading up to the election. A bigger concern is AMZN stock’s lofty valuation. The company trades for 170 times earnings and 2.8 times sales … numbers that are off the charts for a retailer. To put them in perspective, Wal-Mart Stores, Inc. (NYSE:WMT) sports a price-to-earnings ratio of 15 and a price-to-sales ratio of 0.5.
This was always a hang-up for me in the past, and if AMZN were purely a retailer I’d argue that Amazon stock was wildly overpriced. Retail is a cutthroat business with meager profit margins.
The thing is, AMZN isn’t purely a retailer. It’s also a leading business technology services company, and it’s busily putting stalwarts like International Business Machines Corp. (NYSE:IBM) out of business.
Already, AWS is responsible for the majority of Amazon’s operating profit. Looking at AMZN’s price-to-sales ratio, at 2.8 the company is actually quite a bit cheaper than Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL), which trade at 5.4 and 4.3, respectively.
Bottom Line on Amazon Stock
Now, I realize that these are nowhere near apples-to-apples comparisons. But if you consider Amazon a “technology company” rather than a retailer, its valuation is by no means unreasonable.
If you’ve been itching to buy AMZN stock but have been put off by the price, use the recent setback as a buying opportunity. Even if Trump decides to really put the screws to Bezos & Company — and I have very serious doubts that he will — the success of AWS alone makes the company and Amazon stock compelling.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he did not hold a position in any of the aforementioned securities.
