Last week, I discussed some troublesome headlines for Google parent Alphabet Inc. (GOOG, GOOGL) and Apple Inc. (AAPL). I went over the recent Senate bill trying to level the playing field for third-party app stores on Apple's iOS and Google's Android platforms. If you're worried about those stocks, check out that article if you haven't.
Today, we'll discuss what implications government oversight might have to tech giant Amazon.com, Inc. (AMZN). Recent stories are troubling some investors.
- There are antitrust concerns for Amazon, which could worry investors.
- Looking back at prior antitrust cases, the outcomes weren't terrible for investors.
- Amazon's stock has been a Big Money favorite in a multi-year uptrend, which suggests that investors should not stress too much over antitrust concerns.
In 2017, a Yale law student wrote a paper called "Amazon's Antitrust Paradox" criticizing the company's intensifying grip of control in the marketplace. That student was Lina Kahn, who has and continues to be a passionate critic of the big tech companies Facebook, Inc. (FB), Google, Apple, and Amazon. She was installed by President Joe Biden as the youngest FTC Chair in history. And with Biden wanting the tech firms to "just pay their fair share of taxes," it's clear that sights are set on Amazon.
The FTC is formally investigating these tech behemoths. In a recent win for Facebook, a federal judge dismissed the antitrust lawsuit filed by the FTC citing not enough evidence to prove a monopoly. But the judge is allowing a revised complaint.
This all stems from the Sherman Act of 1890, which essentially outlaws monopolies. The FTC was established soon after to ensure fair business. This can mostly be traced back to John D. Rockefeller and Henry Flagler's Standard Oil, which was the largest oil refiner in the world. It was eventually busted up into 30 companies including some of the biggest household names in energy today. Needless to say, several of those companies went on to become mammoth in their own right.
So, what happens if Amazon is deemed too big to continue and busted up for fear of an uncontrollable monopoly? History suggests a few possible outcomes, but none seem to be anything to really stress over if you're an investor. Let's look at some possible scenarios:
- Congress hits an impasse, and nothing happens. This is the favorite state of the stock market: status quo. If the government can't reach a verdict, then Amazon is free to continue business as usual. It's clear to see that Amazon continues to grow in many areas and that, in the short run, this scenario is entirely plausible. But in the long run, it'll be difficult to prove that Amazon isn't too big to exist if it keeps growing along its current trajectory.
- Some limits are imposed, but Amazon remains wholly or mostly intact. This is a similar scenario to the article I mentioned earlier. For example, if Google and Apple are forced to allow third-party app stores, it's seen as a win for big government. But in the end, it would have a nominal effect on their overall businesses, which remain completely intact.
- Amazon is forced to break up. It's good to look at past break-ups here to get an idea of what it would look like. Standard Oil became 30 companies including Exxon (XOM), BP (BP), and Chevron (CVX). That made shareholders beaucoup bucks. AT&T (T) was forced to breakup in the '70s and '80s, and many of those companies went on to do well in their own right. Verizon (VZ) is one of the companies that came from the AT&T antitrust breakup and made investors a lot of money.
It is my opinion that none of the three scenarios are really anything to worry about. Plus, imagine this: Amazon breaks up into a few companies. Let's imagine that Amazon's online retail, cloud services (AWS), transport (Flex and trucking), and media (Prime Video and MGM) all get split up. These four divisions could each go on to heights of their own and become dividend payers. Imagine owning one company that splits into four and then each then splits its shares and then each pays you a dividend. It might be longer-term thinking than some investors want, but that's a dream scenario. It might even have you rooting for a break-up!
In assessing whether these latest FTC antitrust talks mar the investment thesis of Amazon, let's first look at fundamentals. The table below shows how solid of a business this monster has: one- and three-year sales and earnings growth with a huge profit margin alone are enough to show how the company thrives. In the below graphic, Juice is good, so-so is ok, and not ideal is underwhelming:
Fundamentals are nice and all, but I also consult trading and technical metrics when assessing if Wall Street agrees with me. The way I look at stocks is by following the Big Money buying and selling. When big volume plows into a stock trading at a near-term high, it generates a buy signal. Big volume on a stock breaking lower is a sell signal. When Big Money buy signals pile up on fundamentally superior stocks, that's a solid sign that big-time investors are likely bullish.
Here's a look at Amazon shares. They've had weak performance recently due to an earnings disappointment. Technicals have been pretty unimpressive so far this year:
But on the bottom of that table, you see the Big Money data. Clearly, AMZN has been a magnet for Big Money. The outlier status just means that the stock has been highly ranked for years. You can see some of those times when Amazon saw outsized buying:
The end result is this: Amazon is currently facing some worrisome headlines. A company of this size will likely continue to face issues down the line. But the net outcome of any FTC limitations or mandated break-up will likely still serve investors well in the long run.
Solid fundamentals, plus growth, and profitability have made this a great stock over the years. It's been hard to bet against it.
The Bottom Line
Antitrust issues come about when companies get too big. We went over a couple in this article, and the end result wasn't terrible for investors. Whatever happens to Amazon is anyone's guess. Just keep some perspective is all I ask.
Disclosure: The author holds no position in AMZN at the time of publication but holds long positions in GOOGL and GOOG in personal and managed accounts.