Some people were sweating the Supreme Court decision on whether and how Amazon.com, Inc. (NASDAQ:AMZN) should collect sales tax, but the decision won’t hurt Amazon stock in the long run.
The red-hot digital retail sector got slammed after the Supreme Court overturned a 1992 interstate commerce precedent and ruled, 5-4, that states have the legal right to collect sales taxes from digital retailers, regardless of whether or not the retailer has a physical presence in their state.
It is a big ruling that levels the playing field for all retailers. Previously, digital retailers weren’t legally required to collect sales taxes in states in which they didn’t have a physical presence. That gave digital retailers a distinct pricing advantage over brick-and-mortar retailers, and is often seen as a big reason why digital retail has been eating brick-and-mortar retail’s lunch.
In response to the ruling, digital retail giants like Amazon, eBay Inc (NASDAQ:EBAY), Etsy Inc (NASDAQ:ETSY), and Wayfair Inc (NYSE:W) all saw their stock prices drop.
But with respect to Amazon stock, the Supreme Court ruling on sales tax is much ado about nothing. Amazon already collects state sales taxes on first-party sales in essentially every state, so the ruling only affects third-party sales.
With respect to those sales, the value prop of Amazon’s e-commerce ecosystem extends far beyond product prices, and as such, a slight bump up in prices from sales taxes won’t cause much, if any, damage.
Here’s a deeper look.
Amazon Will Brush off Sales Tax Impact
Firstly, Amazon already collects state sales taxes on first-party sales, or the stuff Amazon sells directly. Therefore, the ruling really only affects Amazon’s third-party sales, which is just a portion of Amazon’s overall digital sales pie.
Secondly, Amazon has already proven its ability withstand sales tax impacts. Amazon’s first-party business didn’t always collect sales taxes. But over the past several years, as the e-retail giant has expanded its physical presence through warehouses, data centers, bookstores and Whole Foods locations, Amazon has started collecting sales taxes on first-party sales.
This happened in the background, and without many people noticing. During that stretch, nothing changed about the overarching Amazon growth narrative. E-commerce sales continued to surge, and the Prime membership base soared, too.
Why? Because Amazon is so much more than just low product prices. Amazon is Amazon Prime, and Amazon Prime is low product prices in combination with free shipping, video streaming, Whole Foods perks, restaurant delivery, music streaming, and much, much more.
In other words, the Amazon e-commerce ecosystem is so robust and its value prop so meaningful that a slight bump up in prices from sales taxes didn’t do much to the first-party business.
And it won’t do much to the third-party business, either. Amazon will start collecting sales taxes on third-party sales over the next several years, and hardly anyone will notice.
Many Reasons to Like Amazon Stock
Outside of the Supreme Court ruling, there are plenty of reasons to like Amazon here and now.
Ecommerce sales growth in the U.S. is only accelerating, and Amazon’s share of that growing pie is getting bigger. Meanwhile, Amazon’s smart home business is booming, headline by 50% Amazon Echo installed base growth in the U.S. last year.
On the cloud side of things, Amazon Web Services continues to dominate the secular growth cloud industry. Notably, Amazon’s e-commerce competitor Zulily migrated its infrastructure to AWS recently.
Elsewhere, Amazon Video is a making a big push in the live sports streaming market, and recently acquired exclusive rights to stream some Premier League soccer games. Amazon is also making an equally big push in the cosmetics market, flirting with offering home insurance products, and putting Alexa into Marriott hotels.
In other words, there is a lot of good and innovative “stuff” happening at Amazon right now. The sum of all this “stuff” is why Amazon stock continues to roar higher, and now sits above $1,700, versus a $1,000 price tag a year ago.
Bottom Line on Amazon Stock
The Supreme Court ruling on sales tax is nothing but noise for Amazon stock. Don’t let the noise distract you. Instead, focus on the big-picture growth narrative, which remains as promising as ever.
As of this writing, Luke Lango was long AMZN.
