A recent report by The Wall Street Journal claims that the Federal Trade Commission (FTC) is preparing to file a sweeping antitrust lawsuit against tech giant Amazon (AMZN 1.10%), perhaps as soon as this month. This isn't surprising as the FTC has battled Big Tech's hold on several industries with recent lawsuits against Google parent Alphabet and social media giant Meta Platforms (formerly Facebook), an existing suit against Amazon, and several investigations in progress.
Whether the lawsuits are justified and Big Tech wields too much power is for others to sort out. This article focuses on how investors should react.
The current lawsuit against Amazon is narrow and relates to Amazon Prime signups when customers check out, but the as-yet-unfiled case could be significantly more encompassing. Reports say it could result in the breakup of the company, but there are other possibilities as well. Let's look at each.
Amazon worst-case scenario: A massive company breakup
If the FTC wins this case, the worst-case scenario for Amazon involves the court ordering a breakup of the company. To understand what this could mean, you need to know how Amazon makes its money. Most people know that Amazon is the largest e-commerce company in the U.S. But it is also the world's largest cloud-services company with Amazon Web Service (AWS), and it has other major revenue streams like the various services it offers to third-party sellers, digital advertising, and subscriptions. The chart below shows Amazon's sales in each category for 2022.
Data source: Amazon. Chart by author.
Further complicating matters, while AWS accounted for only 16% of overall sales in 2022, it effectively accounted for every dollar of Amazon's operating profits for the past few quarters. AWS is a much higher-margin business than e-commerce.
If the company were to break up, the structure of the new companies isn't known. It could become two or three new companies with key businesses separated in various ways. Shareholders would own shares in each new company based on a predetermined allocation, were this to happen.
This scenario has positives and negatives. On the negative side, it would decrease Amazon's competitive advantage of having each business in-house and feeding into a cohesive ecosystem. It would also cause uncertainty, which could lower the stock prices as investors weigh the prospects of the new companies.
On the other hand, it gives investors more choice. Many have dreamed of owning the highly profitable AWS business for years without the drag the e-commerce segment creates. They could get the opportunity in this scenario.
It is important to note that a scenario like this isn't likely. The last major forced breakup involving antitrust was AT&T in 1984. that resulted in the creation of several (successful) "Baby Bells" that gave consumers access to more choices and lower prices for things like long-distance service and phones.
It will take years to get through any trial (and likely appeals process) that might result from this rumored action. In the meantime, the stock will trade on results, and Amazon's recent results are very encouraging.
The more likely outcome for Amazon
The worst-case scenario would be a big deal, but such a case is more likely to end in a settlement that avoids such a scenario, as most similar cases eventually do. Such a settlement could involve fines and/or changes in practices and the extent of any penalties is a guessing game. A recent settlement involving Alphabet resulted in a fine of $170 million (a relative pittance), while Meta platforms paid a record $5 billion in 2019 to settle a privacy-related lawsuit.
The extent of any possible fines will likely be related to Amazon's earnings and profits over time. Amazon reported $134 billion in revenue and $7.7 billion in operating income in its most recent quarter.
Other stipulations from a settlement could end up damaging shareholder value. For instance, changes in practices could restrict Amazon's ability to provide fulfillment and logistics services to third-party sellers, favor its own products in searches, and other changes that would weaken its hold on the market. How damaging this is remains to be seen, but this type of outcome should concern investors. Amazon would still likely be a dominant force in the business segments it operates in, but declines in income would hurt the value of the stock.
Amazon investors shouldn't panic just yet
Shareholders shouldn't panic if (or when) the lawsuit is announced. Amazon management has prepared for this for a long time and can afford to effectively defend itself in court. These cases take years to prepare for, to try, and then to go through appeals or be resolved through settlements.
Wall Street isn't too concerned, judging by the stock's 4% price rise since the story broke on Sept. 5. Big Tech has been a target for years. Practices have been adjusted, fines have been paid, and these companies continue to dominate industries and become tremendous investments. When the dust settles, Amazon will likely be no different.
