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How a U.S. crackdown on cheap Chinese imports could help Amazon but challenge Meta

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2 months ago

September 23, 2024

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How a U.S. crackdown on cheap Chinese imports could help Amazon but challenge Meta

The White House wants to close a trade loophole exploited by Chinese discount e-retailers — a move that would have a ripple effect on at least two of our portfolio stocks: Amazon and Meta Platforms. The Biden-Harris Administration took executive action earlier this month to call on Congress to pass legislation to curb what it calls the abuse of the de minimis exemption. The provision permits packages valued at $800 or less to enter the U.S. free of duties and taxes and with minimal scrutiny. These shipments over the past decade have exponentially increased from 140 million a year to more than a billion , according to the announcement. The de minimis exemption has allowed Chinese e-commerce giants, particularly low-cost Temu and Shein, to flourish. Curtailing the items eligible could embolden Amazon ‘s competitive online retail advantage — but also poses a risk to fellow portfolio stock Meta Platforms , which has benefited from the likes of Temu and Shein flooding social media with ads hocking their products. Pinduoduo -owned Temu sells a variety of goods under the de minimis exemption, including clothing, electronics, household items, and beauty products. Temu has risen in popularity in the U.S. for selling items directly from Chinese merchants at massive discounts. Temu is generally seen as a growing competitor to Amazon since its prices are often lower. Amazon advantages According to Deutsche Bank, The White House action “would likely affect how low-value goods are treated under U.S. customs laws,” posing a serious financial challenge for Temu and Shein. The implications would be positive for Amazon. De minimis exemption changes could blunt the influence of foreign competitors, which Deutsche Bank analysts said, have been able to offer more than 50% lower prices by avoiding tariffs. Fewer qualified items would mean increased costs per order and let Amazon slip in and fill in the gap for Chinese third-party sellers looking to sell their wares to U.S. consumers. If an average tariff rate of 16% were applied, Temu’s costs would increase by $4.45 per order, the analysts projected. That would further strain the company’s unit economics since it’s already losing between $35 to $40 per transaction, Deutsche Bank estimated. To offset higher trade expenses, Temu may try to pass on additional costs to the consumer. But that would narrow its pricing advantage over Amazon where its prices are currently 4% to 10% lower. Given that Temu’s path to profitability looks difficult, Deutsche Bank believes any “potential price increases on Temu’s platform would most benefit Amazon.” Amazon, for its part, also benefits from de minimis laws in some cases, but Deutsche Bank concluded the company is “the clear beneficiary in our coverage to the extent that this loophole is closed and the Temu value-seeking demand fragments.” In a possible scenario where tariff changes don’t pass, Temu already faces an “uphill battle towards unit profitability if the company plans to maintain its pricing advantage,” according to analysts. JPMorgan challenges this view, saying, “We do not think the sustainability of the [Temu] business model will be affected. The analysts said a crackdown on de minimis shipments will have a “manageable impact on financials [of Chinese retailers] which will continue to grow and turn profitable over time.” Temu’s U.S. business may be impacted from the provision but “is only a minority for total China cross-border e-commerce,” the analysts said, adding Temu’s U.S. exposure is 40% of its gross merchandise value. AMZN YTD mountain Amazon YTD The Club’s view lands somewhere in the middle. Pressure on Chinese e-commerce platforms could be a small tailwind to Amazon’s retail business, but “for the stock to get back to its $200 high, Amazon needs to show it can further reduce the cost to serve,” said Jeff Marks, the Investing Club’s director of portfolio analysis. The Amazon Web Services cloud unit also needs to keep delivering more great quarters, he added. Meta challenges On the other hand, the trade shift could present a challenge for Meta, which relies on advertising from e-commerce platforms. Meta has enjoyed a strong boost from Chinese retailers. In 2023, China-based advertisers represented 10% of Meta’s overall revenue as companies like Temu and Shein attempted to reach customers in other markets. China advertiser spending at Meta grew 41% year over year in the first quarter of 2024 but tapered in the second quarter. Management signaled further deceleration in the third quarter as it compares against stronger periods, suggesting that reducing de minimis shipments could exacerbate an already cooling trend. This comes as Meta’s stock has soared 75% over the past year, while emerging as the best performer among the Magnificent Seven tech stocks coming out of its second-quarter earnings in August. Meta has enjoyed a strong boost from Chinese advertisers. In 2023, China-based advertisers represented 10% of Meta’s overall revenue as companies like Temu and Shein attempted to reach customers in other markets. Meta’s growth in ad spending from China advertisers was also strong to start out the first quarter of 2024, growing 41% year over year, but growth tapered in the second quarter. Management signaled further deceleration in the third quarter as it compares against stronger periods, suggesting the tariffs could exacerbate an already cooling trend. META YTD mountain Meta Platforms YTD To be sure, Meta shares have already broken out to new highs despite guiding for slower ad spending from Chinese retailers — demonstrating a strong return on investment from its aggressive spending on artificial intelligence as it relates to serving more contextualized ads. “Even if ad spending from Temu and Shein tapers off, it might be able to replace that spend from other companies [that] look to reach its 3.27 billion daily active users,” said Marks. Advancements in Meta’s AI strategy are also increasing user engagement on its social media platforms, he added, which make ads more effective. (Jim Cramer’s Charitable Trust is long AMZN, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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