06 Nov Abe Garver on eCommerce Valuations and Tax Issues
Bloomberg: Abe Garver (Forbes and SeekingAlpha contributor and overall Internet M&A extraordinaire) discusses taxes and valuations in the eCommerce sector. His concern is that we are seeing compressed margins in the sector for several internal and external reasons.
1. Valuations. Stocks are up 62% this year, creating somewhat of what Garver calls a “frothy” scenario where companies will want to sell.
2. Expiration of Bush Tax cuts, including long-term capital gains coupled with the 62.5% eCommerce growth/returns in the last 12 months is creating the need for a sell-off.
3. eCommerce interstate sales tax transactions. Many states are now requiring state and local sales tax collections for companies doing business via eCommerce and online. This has downward pressure on prices in three ways.
a. Collection cost increases from (1.5% to 13.5%)
b. Revenues can drop between 10% and 13% per company
c. High-end companies like BlueNile will see
Each of these components puts downward pressure on margins which, thanks to the likes of Amazon, are already razor-thin in eCommerce.
4. Gross margins (basic mark-ups) are compressed because of some of the issues stated above, but also because Amazon is always seeking for lower prices, making up for it on volumes. Combine the compressed margins with cannibalization in M&A and it could prove to be a rough go of it for the eCommerce sector.
5. October 22nd announced earnings for Amazon. Markup was 24% in Q1 and 26% in Q2. Anything below 24% generally causes a sell off because the company’s value is highly dependent on what they are able to squeeze out of every last penny of revenues. Because of the issues stated above, it is unlikely that Abe, or myself for that matter, thinks Amazon and others will be able to make up for tax issues with simple increases in logistical efficiency.