Amazon.com is currently facing a long-awaited lawsuit from the Federal Trade Commission (FTC). While the possibility of the company being broken up is a dramatic outcome, it may not be the worst result for the online retailer and cloud company.
Stock Reaction
In premarket trading on Wednesday, Amazon stock (ticker: AMZN) saw a small increase of 0.1%, reaching $126.07. Although the stock had dropped slightly before the announcement, it only experienced a drop of less than 1% after the FTC and 17 states filed their lawsuit on Tuesday.
The investors’ muted reaction appears to be logical at this point. The outcome of the FTC’s case is uncertain, considering the agency’s recent string of defeats in high-profile cases, such as its failure to block Microsoft’s (MSFT) acquisition of Activision Blizzard (ATVI).
Unlocking Shareholder Value
Even if the FTC wins the lawsuit and enforces significant structural changes at Amazon, this could potentially unlock value for shareholders.
According to D.A. Davidson analyst Tom Forte, a breakup of Amazon could increase the value of the company’s shares. In a research note, Forte stated that based on their sum-of-parts analysis, Amazon’s stock could be worth as much as $193 or a minimum of $148 if it were split up into three parts: its retail operation, a third-party retail or marketplace platform, and its cloud-computing business. Forte has a Buy rating on Amazon stock and a $150 price target.
Potential Breakup?
While FTC Chair Lina Khan did not confirm during a briefing with reporters whether the agency would pursue a breakup of Amazon, the lawsuit does mention the possibility of seeking “structural relief,” which often refers to a potential breakup, according to The Wall Street Journal.
The FTC Alleges Amazon Violated Antitrust Laws
The Federal Trade Commission (FTC) has filed a lawsuit against Amazon, alleging that the company violated antitrust laws. The allegations include artificially high prices and unfairly locking sellers into its platform. In response, Amazon issued a statement stating its belief that the case is factually and legally incorrect and that it plans to fight the lawsuit.
Potential Consequences for Amazon
If the FTC does not push for the breakup of Amazon, the company could still face a series of other antitrust measures. While a clean breakup may seem drastic, in the long run, these additional measures could potentially be more damaging. It is important to consider the potential long-term impact on the company.
Concerns Over Retail Profitability
One significant concern over the past few years for Amazon’s stock performance has been its weak retail profitability. Despite efforts to improve margins, regulators argue that these attempts have led to unfair treatment of third-party sellers. It is crucial to note that any antitrust measures that hinder Amazon’s ability to improve its margins may further hamper its stock performance.
Public Opinion and Potential Instability
A survey conducted by market research firm The Harris Poll revealed that even if Amazon were to win the lawsuit against the FTC, public opinion suggests that this victory may only be temporary. The survey, which involved 1,787 Americans in July, found that almost half of U.S. adults believe that the FTC should take a more aggressive stance against large companies. Furthermore, four out of five respondents claimed that major corporations hold too much power.
The CEO of The Harris Poll, Will Johnson, stated, “Our data shows that there is a significant appetite for further antitrust action among all generations. Baby boomers, in particular, are more inclined towards an activist FTC, as they have witnessed a rise in monopolies over the years.”
Challenges for Shareholders
If Amazon continues to face increased scrutiny and regulatory action from an aggressive FTC while simultaneously striving to improve its retail margins, shareholders may face challenging times ahead. In this context, a breakup of the company could potentially be a less painful option for all parties involved.
