Before investing in a company, I like to read up on the most recent quarterly report, which outlines the risks that the company might face in the future. In fact, risk factors is my favorite section in the 10K (annual) and 10Q (quarterly) reports. The financial reports give you a picture of how the company has been doing, but the risk factors give you an idea of what might be in the blind side, stuff overlooked by a common investor. There are a total of 23 risk factors listed in Amazon’s most recent 10Q (July 2018). After reading through all the risk factors, I have picked 6 factors worth discussing in this week’s blog post. I will briefly explain the message Amazon is trying to convey with each of the risk factors. Let’s begin.
1. Amazon May Experience Significant Fluctuations in its Operating Results and Growth Rate
Amazon states that portion of its expenses and investments is fixed, and they may not be able to adjust its spending quickly enough if sales are less than expected. Furthermore, its business is affected by general economic conditions worldwide. Therefore, a softening in demand, caused by changes in customer preferences or a weakening of the US or global economies, would result in a decrease of revenue/growth. On page 36 of the 10Q, Amazon lists various other reasons that could fluctuate its sales and operating results such as the introduction of competitive stores/websites, changes in adoption rate of internet, ability to offer products, data theft, computer intrusion, etc.
2. International Operations Exposes Amazon to Numerous Risks
Amazon’s international activities are significant to its revenue and profits. In certain international market segments, Amazon has little to no operating experience and may not benefit from any first-to-market advantages. Amazon states that it is costly to establish, develop, and maintain international operations. Amazon’s international sales and operations are subject to number of risks, including: local economic and political conditions; government regulation of e-commerce; export/custom duties and tariffs; restrictions on sales and distribution of certain products; business licensing; shorter payable and longer receivable cycles; nationalization; limited technology infrastructure; geopolitical events; lower levels of internet usage; lower level of consumer spending; difficulty in staffing; labor unions; laws of U.S. affecting trade; increased payment risks, etc.
3. Amazon Faces Risks Related to System Interruption and Lack of Redundancy
Amazon experiences occasional system interruptions and delays that makes its website unavailable, which could potentially reduce its net sales and attractiveness of its products and services. Amazon’s operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquake, computer virus, physical or electronic break-ins, etc. These events could damage Amazon’s reputation and be expensive to remedy. Additionally, Amazon’s systems are not fully redundant and its disaster recovery planning may not be sufficient. Lastly, Amazon claims that it may not have adequate insurance coverage to compensate for any related losses.
4. Amazon Could be Subject to Tax Liabilities
A June 2018 Supreme Court decision held that states can require remote sellers to collect state and local sales tax. Amazon may not have sufficient time to build systems and processes to collect theses taxes properly, or at all. Failure to comply with such laws could result in substantial tax liabilities, including for past sales, penalties, and interest.
Additionally, Amazon is currently subject to audit in various jurisdictions, which may assess additional tax liabilities against Amazon. Amazon claims that developments in an audit, litigation, regulations, administrative practices, and interpretations could have a material effect on its operating results or cash flow in the period that the development occurs, as well as prior and subsequent periods.
5. Amazon is Subject to Payments-Related Risks
Amazon accepts payments using a variety of methods such as credit card, debit card, customer invoicing, physical bank check, payment upon delivery, etc. For certain payment methods, including credit and debit cards, Amazon pays interchange and other fees, which increase over time and raise its operating costs and lower profitability. Amazon is subject to payment card association operating rules, which include data security rules, certification requirements, and rules governing electronic funds transfers. Any of these operating rules could change or be reinterpreted to make it difficult or impossible for Amazon to comply. If Amazon fails to comply with these rules, it may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose its ability to accept credit and debit card payments from customers or facilitate other types of online payments, which would adversely affect Amazon’s business and operating results.
If Amazon is found to in violation of applicable laws or regulations (relating to payments, money laundering, international money transfers, privacy and information security, and electronic funds transfer), it could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services.
6. Amazon Faces Intense Competition
Amazon has competitors across geographies in different industries, including physical, and e-commerce retail, e-commerce services, digital content and electronic devices, and web and infrastructure computing services. Amazon claims that some of its competitors have greater resources, longer histories, more customers, and greater brand recognition. These competitors could secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing.
Amazon believes that with the development of new business models and the entry of new and well-funded competitors, competition may intensify. In addition, new and enhanced technologies (search, web and infrastructure computing services, and digital content) may increase Amazon’s competition. Lastly, the internet facilitates competitive entry and comparison shopping, and increased competition would reduce Amazon’s sales and profits. (Note: Almost all companies have competition listed as one of their risk factors)
Hope you learned a little and found this blog post helpful. We talked the top 6 risk factors that Amazon (AMZN) faces. Hope you realized that there is more to a company that just ratios and numbers. It is important to look at the company from the management’s perspective. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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