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Is Antitrust a Bigger Risk Than COVID-19 For Amazon Stock?

By Chris Neiger - Oct 28, 2020 at 6:52AM

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Investors should be aware of, but not panic about, the recent regulatory scrutiny of Amazon.

COVID-19 has wreaked havoc on economies around the world and has upended many industries, including airlines, travel, and restaurants. In-store retail shopping has suffered as well, as social distancing became the norm months ago and people spent more time at home. 

But the economic effects of the pandemic also caused a major strain on retail stocks, including Amazon.com ( AMZN -1.53% ), as they were forced to adapt to an influx of online shopping. Even Amazon, with its massive warehouses full of goods and its extensive delivery network, struggled to keep up with demand. The company has since gotten deliveries back on track and is actually thriving during the pandemic. But while COVID-19 hasn't knocked Amazon off of its footing, lawmakers could. Some elected officials are increasing their scrutiny of Amazon and its peers, and it could eventually result in more antitrust regulations.

A gavel sitting on top of a computer.

Image source: Getty Images.

Why antitrust is a risk for Amazon 

Over the summer the CEOs of Alphabet, Apple, Facebook, and Amazon appeared before a House of Representatives subcommittee to discuss antitrust issues. And at the beginning of October, the subcommittee released its report, saying,

"Our investigation leaves no doubt that there is a clear and compelling need for Congress and the antitrust enforcement agencies to take action that restores competition, improves innovation, and safeguards our democracy."

The subcommittee's opinion was that Amazon has an unfair advantage over the third-party merchants on its website, and recommended for all of the companies it was investigating that they can't promote their own products over third-party sellers' products. However, Amazon is concerned that some of the committee's recommendations would force third-party sellers to sell their products on a separate website from where Amazon's products are sold (in theory, to keep them from competing directly with Amazon's products), which could hurt smaller businesses who are trying to reach online shoppers.

In response to the lawmakers' conclusions, Amazon said in a blog post,

"The flawed thinking would have the primary effect of forcing millions of independent retailers out of online stores, thereby depriving these small businesses of one of the fastest and most profitable ways available to reach customers."

Amazon says that small and medium-sized businesses account for about 60% of physical products sold on the company's website and that those sales are growing faster than Amazon's own retail sales. Additionally, Amazon's private-label goods account for just 1% of the sales on its website, which is a far smaller percentage of white-label sales than its competitors. Target's private labels account for 30%, Costco's are 20%, and Walmart's are 15%.

Large companies always take antitrust issues seriously, especially when they've been called before lawmakers to testify and with threats of more Congressional scrutiny ahead. 

But Amazon investors shouldn't panic over any of this just yet. Lawmakers haven't made any specific moves to break up Amazon or change its overall business practices, and any future decisions to do so would likely take a long time to accomplish and be challenged by Amazon in court. It's also possible that Amazon could begin reporting more e-commerce metrics to show that its business practices aren't monopolistic. The company is well-known for using its data to make businesses decisions, and it could use that data to show lawmakers that third-party sellers have plenty of advantages on its platform.

Investors shouldn't worry that an Amazon break-up is imminent, but they do need to understand that Amazon has caught the attention of lawmakers, and there will likely be more scrutiny of the company's business in the future. That could lead Amazon to make its own internal changes that prove that third-party sellers are able to compete and thrive on its website, in order to avoid having Congress step in and try to make changes.

But whatever happens, now isn't the time for investors to change their investing thesis about the company. Amazon is still growing its e-commerce sale and has its hand in other businesses, including cloud computing, that is growing as well. If you're an Amazon shareholder or considering buying shares, it's likely still a good time to buy Amazon's stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,507.07 (-1.53%) $-54.50
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$140.63 (-1.40%) $-2.00
Target Corporation Stock Quote
Target Corporation
TGT
$243.84 (-2.13%) $-5.32
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$324.46 (-4.01%) $-13.57
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$539.38 (-2.79%) $-15.50
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,837.95 (-2.50%) $-72.66
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.30 (3.16%) $5.06
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,849.04 (-2.51%) $-73.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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