About a week ago, the Federal Trade Commission (FTC) filed a lawsuit against Amazon (AMZN -0.63%) alleging that the e-commerce behemoth is a monopolist, and asserting that it uses its dominant size in unfair and anti-competitive ways to make it difficult for rivals and sellers alike to succeed online. In addition, 17 states joined the lawsuit as partners.
If you as an investor are spooked by the looming potential repercussions of that lawsuit, you aren't alone. Moreover, the case is likely to garner a lot of attention from the media, so it is important for investors to take the full picture into account before panic selling.
My prediction is that Amazon will win this lawsuit, and any dips in the stock along the way could be compelling buying opportunities. Here's why I'm bullish on Amazon's prospects.
What is the lawsuit about?
At a high level, the FTC's complaint revolves around Amazon's alleged dominance in online shopping. More specifically, the FTC alleges that Amazon employs "anti-discounting measures" to discourage other e-commerce platforms from offering lower prices for the same goods it sells. In theory, this tactic could also impact third-party sellers using Amazon, almost forcing them to rely on the platform as opposed to using multiple online options.
The FTC also asserts that Amazon takes advantage of its sellers by taking high commissions on items that are sold through the platform, as well as charging advertising fees "that have become virtually necessary for sellers to do business." These high fees, it says, lead to higher prices for consumers.
On the surface, these complaints do not bode well for Amazon.
Image Source: Getty Images
What can Amazon do to win?
Amazon responded swiftly to the allegations with a blog post on its website. Naturally, the company's stance is that the practices the FTC outlines as harmful are actually a good thing for consumers and competition. Amazon will need to prove this throughout the ongoing litigation.
For long-term investors, there are several factors to consider. And questioning if Amazon really does have monopoly-like power is a good place to start.
While Amazon is undoubtedly a major player in online retail, claiming the company has monopoly power may be a stretch. Brick-and-mortar chains such as Walmart and Target also have meaningful online operations. Additionally, niche outlets such as Etsy have proven to be formidable players in the e-commerce market.
Another thing to consider is that Amazon has built many different businesses beyond e-commerce. The company's cloud computing segment, Amazon Web Services, is a major component of its overall business, and in that arena, it faces intense competition from big tech stalwarts Microsoft and Alphabet. Amazon also has a budding advertising business, another way in which it competes with Alphabet, and also Meta Platforms.
To me, while retail is Amazon's biggest revenue contributor, it is also just one stitch in the company's larger fabric. Amazon has myriad competitors both online and offline, which could be the very reason it engages in aggressive strategies aimed at acquiring sticky buyers and sellers. Given this outlook, the FTC's complaints begin to look unconvincing.
Is this a buying opportunity?
I see two primary risk factors here. First, litigation tends to be a long, arduous process. As a result, there is a good chance that Amazon will incur hefty expenses as it tries to build and prove its case. I view this as capital that could otherwise be allocated to strategic initiatives that help create long-term value. Second, should the FTC come out victorious, punishments for Amazon could vary from significant fines levied on the company to even a potential breakup of the business into separate, smaller enterprises.
Ultimately, I do not think the latter is a real threat. While the FTC has been quite active over the last couple of years, its track record is uneven. Perhaps the highest profile case the FTC made in recent history was attempting to block Microsoft's proposed acquisition of video game company Activision Blizzard. While that deal has not yet closed, all signs point to Microsoft completing the purchase. Microsoft has had to make concessions in order to make this happen, so Amazon will likely have to do the same. Although this is only one data point, it serves as an important example of big tech coming out on top over the FTC.
The dynamics of the Microsoft case offer a good segue into another point as well. Typically, during an acquisition, the stock price of the target company in particular can experience pronounced volatility. One of the reasons for this is that momentum traders enter the picture and try to take advantage of any sudden movements in the stock price as the deal moves through regulatory clearances.
Given how long the litigation has been going, the stock price of Activision Blizzard has naturally been pretty volatile. Subsequently, there have been ample opportunities to benefit from merger arbitrage. Although Amazon is not being blocked from any acquisition pursuits, the same theory could apply here. As the case carries on, there will likely be periods of heightened trading activity, which could be useful for investors if the stock dips significantly.
Amazon is set to report its Q3 earnings within the next couple of weeks. My suggestion would be to listen carefully to management's commentary on the earnings call as it pertains to the FTC's lawsuit. While arbitrage opportunities are tempting, I'd leave them to more sophisticated investors. Rather, my strategy would be to take advantage of inevitable volatility in the stock and try to lower your overall cost basis in a long-term position.
