Amazon.com is facing a long-awaited lawsuit from the Federal Trade Commission. While the company being broken up is the most dramatic potential outcome, it might not be the worst outcome for the online retailer and cloud company.
Amazon
stock (ticker: AMZN) is up 0.1% at $126.07 in premarket trading on Wednesday. The stock dropped less than 1% after the FTC and 17 states filed their lawsuit on Tuesday, although it was trading down ahead of the announcement.
The muted reaction from investors looks logical for now. There’s no guarantee the FTC will win its case, with the agency having suffered a series of recent defeats in high-profile cases, including its failure to block
Microsoft’s
(MSFT) acquisition of
Activision Blizzard
(ATVI).
Even if the FTC does win the lawsuit and presses significant structural changes at Amazon, that could actually unlock some value for shareholders.
“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,” wrote D.A. Davidson analyst Tom Forte in a research note.
Forte estimated Amazon stock could be worth as much as $193, and a minimum of $148 if it were split up. That’s based on Amazon being broken into three parts—its own retail operation, a third-party retail or marketplace platform, and its cloud-computing business. The analyst has a Buy rating on Amazon stock with a $150 price target.
FTC Chair Lina Khan declined to say whether the agency would pursue a breakup of Amazon in a briefing with reporters, according to The Wall Street Journal. However, the lawsuit says the agency could seek “structural relief,” a legal term often used to refer to a potential breakup.
The FTC alleges that Amazon violated antitrust laws by keeping prices artificially high, and locking sellers into its platform. Amazon said in a statement that it believes the case is factually and legally wrong and it will contest the lawsuit.
It’s worth bearing in mind that if the FTC doesn’t press for the breakup of Amazon, the company could face a series of other antitrust measures. In aggregate, those could be more harmful in the long term than a clean breakup now.
The big issue over the past few years for Amazon stock—down 33% from its split-adjusted peak in July 2021—has been concerns over its weak retail profitability. Amazon has been aiming to improve margins but regulators have claimed that has led to unfair behavior to third-party sellers. Any antitrust measures that hamper its margin improvement could hold back the shares.
A survey carried out by market-research firm The Harris Poll suggests that even an Amazon victory over the FTC’s lawsuit could prove temporary, based on public opinion. The survey of 1,787 Americans carried out in July found nearly half of U.S. adults believed the FTC should be more aggressive, while four out of five claimed that large companies held too much power.
“Our data show that more antitrust action would be popular among large portions of all generations,” said Will Johnson, CEO of The Harris Poll. “Baby boomers’ inclination toward a more activist FTC comes after decades of more laissez-faire antitrust policy, and they are the generation that most thinks the economy has more monopolies today than it did 20 years ago.”
A future of Amazon being hounded by a more-aggressive FTC while struggling to improve retail margins offers a difficult picture for shareholders. A breakup could prove to be the less painful option.
Write to Adam Clark at [email protected]
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