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Legal Challenges Are Likely to Put Pressure on Amazon

Warren Buffett likes to invest in companies that have an economic moat, or competitive advantage that makes it hard for other companies to steal market share. Amazon (NASDAQ:AMZN) has a wide and seemingly impenetrable moat, and AMZN stock seems unstoppable in an age of e-commerce hegemony.

amazon sign
Source: Eric Broder Van Dyke /

But is any company or stock truly unstoppable? There’s an old saying that trees don’t grow straight to the heavens, meaning that stocks don’t just go up without pulling back. This rule even applies to the colossus known as Amazon, even if it feels like AMZN stock is destined for $10,000 in a matter of months.

If there’s one force that can stop Amazon’s virtual world takeover, it’s the legal system. A recent court ruling could spawn more legal actions against Amazon, thereby putting a damper on AMZN stock’s amazing bull run.

At the very least, AMZN shareholders should pay attention to what’s going on in the courts. Maybe this will just be a speed bump for Amazon, or maybe it won’t. Since we can’t predict the outcome, investors should hedge their bets accordingly.

A Closer Look at AMZN Stock

In early 2020, some skeptical folks thought that AMZN stock at $1,900 was too pricey. They were in for a rude awakening as even a global pandemic couldn’t stop AMZN shares from powering their way up to $3,000 and beyond.

AMZN stock closed slightly above $3,300 on Aug. 24, marking another day of relentless gains for shareholders. I’ve heard rumors and speculation regarding a possible stock-share split for AMZN. However, Amazon CEO Jeff Bezos hasn’t specifically stated that there will be a split anytime soon.

The trailing 12-month price-to-earnings ratio for AMZN stock is a lofty 127.03. Yet, traders of this stock have become accustomed to P/E ratios in the triple digits. Also, AMZN offers no dividend. It’s not your grandfather’s stock market, and Amazon is emblematic of the current fiscal landscape in which balloons inflate but evidently don’t burst.

The Legal Hammer Comes Down

As massive and powerful as Amazon is, investors should appreciate that no company is entirely impervious to litigation. Thus, the legal hammer came down on Amazon in a landmark case that could have far-reaching implications for e-commerce generally.

On Aug. 13, California Fourth District Court of Appeals effectively ruled that Amazon can be held liable when people buy merchandise through the company’s marketplace, even the transaction was made through a third-party seller.

Allegedly, a customer suffered third-degree burns when a laptop battery, which was sold to her through a third-party seller on Amazon, caught fire.

This ruling overturned a previous decision made by a San Diego Superior Court. In that event, Amazon wasn’t held liable because it was determined that the company was acting as a service provider. Because of this, it was decided that Amazon wasn’t subject to product liability law.

Beyond the Legal Damage

But now, with the higher court’s ruling, Amazon can be held liable and the floodgates could be opened to numerous lawsuits. From a legal standpoint, it won’t be so easy for Amazon to distance itself from transactions gone wrong anymore.

Indeed, high-level courts in Ohio and Pennsylvania are already considering Amazon’s potential liability. Moreover, federal appeals courts are currently mulling cases governed by the laws of Texas and California.

It’s a major blow to the company as transactions via third-party sellers collectively comprise around 60% of Amazon’s e-commerce sales. It’s easy to imagine that there will be enduring financial damage stemming from legal battles.

On top of all that, Amazon could suffer reputational damage. The image of a woman being severely burned by a defective battery is an unsettling one. And just consider the public-relations damage that could occur if a toy sold through Amazon harms a child.

The Bottom Line

I’m not claiming that the Amazon e-commerce empire will collapse tomorrow or next week. However, this court ruling could start a domino effect.

With enough damage, financial and otherwise, Amazon could be pushed off of its pedestal. And with AMZN stock so expensive now, the drawdown could be painful and spectacular.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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