Tech giant Amazon (AMZN -3.29%) has faced its share of headwinds recently. Last year, the company reported a rare net loss as it dealt with economic-related issues. Some investors may also be wary that its legendary founder, Jeff Bezos, is no longer the company's CEO. However, Amazon could now face a potentially more pressing matter: the ire of regulators. The U.S. Federal Trade Commission (FTC) -- whose job is to ensure a healthy and competitive market -- is rumored to be close to formally launching a lawsuit against Amazon. How should investors react to these developments?
Why is the FTC coming after Amazon?
The FTC's actions against Amazon date back to the so-called tech probe that began under the administration of former U.S. President Trump. The government decided to investigate several tech giants for alleged anticompetitive practices. The list included Amazon, Meta Platforms, Apple, and Alphabet. Regulators hoped to remedy these tech giants' alleged monopoly powers by breaking them into smaller businesses.
Turning to Amazon specifically, the FTC claims (among other things) that the company enrolled consumers into its Prime paid subscription program without their knowledge and made it difficult for them to cancel it, coerced or forced merchants to enroll in its logistics program, and blocked lower prices on competing e-commerce platforms. We don't yet know the precise details of the lawsuit, but whatever they are, the allegations against Amazon are serious and could lead to severe consequences for the company if it loses the case.
What should investors do?
We are still some ways away from Amazon being broken down into smaller companies (if that ever happens at all). In fact, at this point, there is no good reason to believe it will happen. Note that earlier this year, the tech giant agreed to pay $30 million (a pretty small sum for Amazon) to settle an FTC lawsuit regarding its voice assistant, Alexa, which allegedly violated users' privacy rights.
The upcoming lawsuit is a different matter. But the point is that it is often easier and cheaper for companies to settle these lawsuits without enduring a potentially long and financially draining legal process. It is worth keeping a close eye on how things evolve, but I remain unapologetically bullish on Amazon for now. The company is a leader in two industries with excellent growth prospects: e-commerce and cloud computing.
Amazon benefits from a competitive edge from multiple sources across both segments. Within e-commerce, Amazon's strong brand power (it is one of the most visited websites in the world), network effect, and established logistics business that allows it to offer free and fast shipping on plenty of items are all incredible strengths that keep consumers coming back.
The company's cloud computing segment arguably benefits from high switching costs. It is also a high-margin business that should improve the bottom line over the long run as it becomes a larger part of Amazon's total sales. Elsewhere, Amazon also has a hand in video and music streaming -- and unlike many of the pure-play leaders in these niches, the company can afford to grab market share by operating its music streaming service at a loss because the rest of its business will pick up the slack.
Amazon's long-term prospects are excellent and should look like the company's past.
AMZN Revenue (Quarterly) data by YCharts
Of course, none of this will matter if the FTC does prevail and the worst happens. But until there are good reasons to think regulators will get their way, it's not time to give up on Amazon stock just yet. That's why, as a shareholder, I am not even considering selling my shares of Amazon. If the company's stock falls once the lawsuit officially launches, that may create a decent entry point for opportunistic investors instead.
