Amazon (NASDAQ:AMZN) has been hit with court-related setbacks on both sides of the Atlantic. Courts in both the U.S. and the U.K. have hurt the company’s continuing bid to extend its reach and revenue. Despite the bad news, Amazon stock has not been greatly affected by it.
With Prime Day near and Amazon stock back near its all-time highs, traders seem unconcerned about the company’s revenue. I don’t expect these legal setbacks to have a major impact on AMZN going forward. As a result, the lack of a pullback by AMZN may disappoint Amazon bulls hoping for a buying opportunity,
Courts on Both Sides of the Atlantic Rule against Amazon
Much like Amazon’s mega-tech counterparts Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Apple (NASDAQ:AAPL), and Facebook (NASDAQ:FB), court-related challenges have begun to plague AMZN. Thanks to a federal appeals court ruling, courts can now hold Amazon liable for products sold by third parties. Third-party sales account for about 58% of the sales on Amazon’s platform.
Retail remains a thin-margin business. However, due to the fees AMZN collects from third-party sales, it earns higher margins from such transactions than from the sales of its own products.
AMZN’s legal struggles affect it outside of the United States. In the U.K., the nation’s Competition and Markets Authority has ordered Amazon to pause its investment in a grocery-delivery startup called Deliveroo. As the justification of its decision, the regulator cited “reasonable grounds” to believe the companies would not remain distinct if Amazon moves forward with the investment.
The Legal Setbacks Have Not and Should Not Hurt Amazon Stock
But in a blow to those hoping for a buying opportunity, AMZN stock seems to have been mostly unaffected by the news. Although rulings that limit the growth of its retail business could lower its revenue growth, most of the company’s profit comes from its cloud platform, Amazon Web Services (AWS). Also, its latest source of profits — selling ads on its platform — should only be minimally affected by legal setbacks. As a result, the company’s legal difficulties may not have as much of an impact on its earnings as some might anticipate.
Moreover, Amazon stock is trading at a more reasonable valuation than in the past. Due to the struggles of Amazon stock over the past year, its price-earnings (PE) ratio has fallen out of the stratosphere. On a forward basis, AMZN’s PE ratio is now about 50.8 . With analysts, on average, predicting that AMZN’s profits will rise 35.6% this year and 40.1% in fiscal 2020, AMZN stock should continue to attract many buyers.
Prime Day Will Also Be a Positive Catalyst for Amazon Stock
Further, investor attention remains focused not on courts, but on Amazon Prime Day. Prime Day will begin on July 15 and run for 48 hours. No research firm has released an estimate for Prime Day sales. However, in 2018, the event brought in $4.2 billion of revenue, coming in 74% higher than Prime Day in 2017.
AMZN is offering more discounts this year than in previous years, and it will hire celebrities to promote the event.
Final Thoughts on Amazon Stock
Thanks to both the structure of the company and Prime Day, Amazon stock should not be affected much by the company’s legal struggles.
There are reasons to be concerned about adverse rulings that can hurt the company’s third-party retail business. However, the cloud and ads generate most of its profits. If liability or antitrust issues impact its retail business and weigh on Amazon stock, long-term AMZN bulls will get a good buying opportunity . But judging by the recent behavior of Amazon stock, everyone seems too focused on Prime Day to worry about legal setbacks.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
