Amazon.com was an exceptionally good investment for those who got in years ago. A share of its stock is more than forty times as valuable as it was 15 years ago. It is fifteen times as valuable as it was 20 years ago. And it is even fifty percent more valuable than it was 5 years ago. However, it is a fourth less valuable than it was 2 years ago. Now the online retailing behemoth is confronting an issue that could drive its stock price down farther. A lawsuit just filed by the Federal Trade Commission could even result in the company being broken up into parts. Is it safe to invest in Amazon today?
FTC Says Amazon Illegally Maintains Monopoly Power
The FTC and 17 state attorneys general are not suing Amazon because it is a big company. They are suing because of anti-competitive practices and because they say Amazon is illegally maintaining monopoly power. The FTC published a lengthy press release laying out how Amazon “has used a set of punitive and coercive tactics to unlawfully maintain its monopolies.” The results for consumers of Amazon’s activities, according to the FTC complaint, include higher prices and lower quality of products and services. Amazon’s actions also make it difficult if not impossible for competitors to get a foothold in the vast range of markets where Amazon has come to dominate.
What Happens to Amazon If It Loses the FTC Lawsuit?
First of all, this sort of lawsuit takes many years to work its way through the courts. The lawsuit that broke up the old AT&T and created the “baby bells” took eight years. Thus we should not see an immediate effect on how Amazon operates, its cash flow, or its very existence as a single company based on this lawsuit. However the market looks to the future. To the extent that Amazon appears to be in trouble, that could affect its stock price. A verdict favoring the FTC could result in Amazon simply having to change a lot of its business practices. That could result in Amazon losing business and profits. Such a verdict could also result in the company being broken up into parts. It is entirely possible that the sum of all parts of a broken up Amazon.com could, in fact, be more valuable than the company as a whole.
Parts of a Broken Up Amazon
Forbes wrote a useful piece about the parts of a broken up Amazon. The focus of the FTC lawsuit largely has to do with the Amazon marketplace and Amazon services that affiliates are essentially required to use. As such, these are likely where court action would be taken to break up the company if the FTC wins its lawsuit. Amazon’s three divisions are really two. Retail, US and international, and AWS cloud computing services. The retail division consists of online stores that make the most money and where the FTC complaints are focused and brick and mortar stores like Whole Foods Market. The retail area includes products and services that Amazon.com sells and the market place which it operates. One of the FTC issues is that Amazon both runs the online marketplace and sells its products there. It also handles distribution of products. Amazon has successfully integrated a lot of necessary features of the retail world. And they have found ways to coerce others to use each and every aspect of their services when others services could better serve other businesses and customers.
Is Amazon’s Share Price Fair?
Amazon has a PE ratio of 101. Meanwhile Apple’s PE ratio is 29, Microsoft’s is 33, Alphabet’s is 30, and Tesla’s is 73. Amazon is a big company that makes a lot of money. Historically Amazon has plowed profits back into the company to expand their current business and move into other promising niches. To the extent that investors do not expect continued impressive growth from Amazon, that could negatively affect its share price. Over the coming months and years, one might expect to see Amazon’s share price rise and fall as investors sort this out. That could go on for years before any final verdict.
SlideShare Version – Is It Safe to Invest in Amazon?