Amazon.com is in the midst of a long-awaited legal battle with the Federal Trade Commission (FTC). While the possibility of the company being broken up is undoubtedly significant, it may not be the worst outcome for this online retailer and cloud powerhouse.
Muted Market Reaction
In premarket trading on Wednesday, Amazon’s stock (ticker: AMZN) saw a modest 0.1% increase to $126.07. Surprisingly, the stock dropped less than 1% after the FTC, along with 17 states, filed their lawsuit on Tuesday. Nevertheless, it is important to note that the stock was already experiencing a downward trend before the announcement.
Investors’ relatively subdued response seems reasonable at this stage. The FTC’s case does not come with a guarantee of success, as the agency has recently faced several defeats in prominent cases. One notable example is its inability to block Microsoft’s (MSFT) acquisition of Activision Blizzard (ATVI).
Unlocking Shareholder Value
Even if the FTC prevails in its lawsuit and enforces substantial structural changes at Amazon, this could actually prove beneficial for shareholders. According to D.A. Davidson analyst Tom Forte, such a scenario might unlock additional value.
In a research note, Forte stated, “Based on our sum-of-parts analysis, we see shares of Amazon as worth more, not less, if the outcome results in the company being cut into pieces.” He estimated that Amazon’s stock could be valued as high as $193 or a minimum of $148 if it were to be split up. This analysis assumes dividing Amazon into three segments: its own retail operation, a third-party retail or marketplace platform, and its cloud-computing business. As a result, Forte maintains a Buy rating on Amazon stock with a $150 price target.
Potential Breakup and Structural Relief
FTC Chair Lina Khan, however, refrained from commenting on whether the agency intends to pursue a breakup of Amazon during a briefing with reporters, as reported by The Wall Street Journal. Nonetheless, the lawsuit suggests that the agency may seek “structural relief,” a legal term commonly associated with the possibility of a breakup.
In conclusion, while Amazon’s legal battle with the FTC looms, investors remain cautiously optimistic. The potential breakup of the company could yield positive results for shareholders, along with the potential for increased shareholder value.
Antitrust Lawsuit Against Amazon: A Challenging Road Ahead
The Federal Trade Commission (FTC) has recently accused Amazon of violating antitrust laws by artificially inflating prices and imposing restrictions on sellers within its platform. In response, Amazon has vehemently denied these allegations in a statement, asserting that the lawsuit is both factually and legally incorrect and promising to contest it.
It is crucial to consider that, in the absence of an Amazon breakup pursued by the FTC, the company may face a series of alternative antitrust measures. While the immediate impact of a breakup may seem drastic, these cumulative actions could potentially have more severe long-term consequences.
One of the key concerns that has plagued Amazon stock in recent years, witnessing a 33% decline from its peak in July 2021, is its weak retail profitability. Amazon has been actively striving to enhance its profit margins. However, regulators argue that this pursuit has resulted in unfair practices towards third-party sellers. Therefore, any antitrust measures that impede margin improvement could hinder the company’s stock performance.
The Harris Poll, a renowned market research firm, conducted a survey involving 1,787 American participants in July. The findings suggest that even if Amazon emerges victorious in the FTC lawsuit, its triumph may only prove temporary due to public opinion. Nearly half of all U.S. adults surveyed expressed their belief that the FTC should adopt a more aggressive stance, with four out of five individuals asserting that large companies possess excessive power.
Will Johnson, CEO of The Harris Poll, further explained, “Our data reveals that a significant portion of every generation supports increased antitrust action. Baby boomers, in particular, display a greater inclination towards a more proactive FTC approach. Having experienced several decades of laissez-faire antitrust policies, this generation perceives a more monopolistic environment in today’s economy compared to 20 years ago.”
Considering the potential scenario where Amazon finds itself relentlessly pursued by an increasingly assertive FTC while simultaneously grappling with improving its retail margins, shareholders face a challenging future. In this context, a breakup may paradoxically offer a less painful option for the company and its stakeholders.