Job-Hungry States Essentially Subsidize Amazon, Help Prop Up its Sky-High PE Ratio

Among the long list of weapons Amazon.com (AMZN) holds to squash traditional retailers, an old-fashioned one has become particularly powerful: jobs. By promising thousands of jobs in new warehouses and offices, the company has convinced several states, and is negotiating with others, to exempt it from state sales taxes for years to come.

That’s a feat no Target (TGT) or Best Buy (BBY) has ever accomplished. And it’s a great example of why shares of barely profitable Amazon are valued in the stratosphere while big box retailers are stuck buying their own.

Amazon.com PE Ratio Chart by YCharts

This latest strategy is a bit cheeky considering Amazon’s Congressional testimony last month purporting to support Internet sales taxes. But it’s nonetheless brilliant. Politicians around the country are desperate to find some credit for creating jobs, making them easy targets. Sales tax exemptions can cut the price of a product on Amazon roughly 5% to 9% -- levels few brick-and-mortar stores can match.

Amazon competitors -- they create jobs too -- are understandably furious about these deals… and most everything Amazon does these days. Earlier this month, the Wall Street Journal reported Target’s frustration with “showrooming,” where customers check out products in their stores before buying them from cheaper online competitors. Amazon’s not the specific villain in Target’s letter to suppliers (asking for help), but Amazon is certainly the most threatening online retailer. Amazon’s sales growth completely swamps that of big box retailers.

Amazon.com Revenue Growth Chart by YCharts

Traditional retailers like to point out the patent unfairness of Amazon strategies. Really, though, Amazon has simply been the smarter innovator. Big box stores have collected tax breaks for opening new stores for decades, but none of them thought to pass on that savings in such a highly visible way. They all have online stores too, but most still treat them as necessary side businesses rather than divisions worth building. According to WSJ, online sales for Target and Wal-Mart account for only 1% or 2% of their total annual sales. Meanwhile, online retailers continue to take bigger and bigger portions of all retail sales.

That’s the talent – the ability to devise successful retail strategies no one has used before – that investors are betting on when they bid Amazon’s PE up to about 100, while shares of Target and Best Buy go instead gor a tenth of that.

Amazon pays dearly for its strategies by accepting money-losing schemes like free shipping and cheap Kindles in return for sales. That makes its operating margins lower -- and going down faster -- than any other big retailer.

Amazon.com Operating Margin TTM Chart by YCharts

Traditional retailers rightly expect this tactic of sacrificing profits for sales will eventually become untenable for Amazon, forcing the company to either raise its prices or cut back on customer perks. But unless the big box stores can come up with a few clever strategies of their own, they might not be around to see Amazon’s comeuppance.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.