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Federal Trade Commission lawsuit could be the first step in an Amazon break up

An antitrust lawsuit from 17 states and the Federal Trade Commission against Amazon (AMZN:NASDAQ) represents the US government’s biggest regulatory challenge yet against the e-commerce giant, one that could see the $1.34 trillion company eventually broken up.
The landmark case targets Amazon’s retail platform, alleging that it’s harmed shoppers and sellers alike on a massive scale. Through an alleged ‘self-reinforcing cycle of dominance and harm’, the plaintiffs claim, Amazon has run an illegal monopoly in ways that are ‘paying off for Amazon, but at great cost to tens of millions of American households and hundreds of thousands of sellers’.
In response, Amazon has argued the case is ‘wrong on the facts and the law’ and warned that a victory for the FTC would lead to slower shipping times or higher prices, including perhaps for Amazon’s Prime subscription service.
If the FTC wins this case one scenario for Amazon, as perceived by many analysts, would be for the court to order a massive break-up of the company, possibly splitting the company into three; Amazon’s first-party retail business (selling goods directly to consumers), it’s third-party retail arm (providing a platform for other sellers), and the cloud computing business AWS, or Amazon Web Services.
Amazon is the largest e-commerce company in the world, but it is also the world’s largest cloud-services company with AWS, and it has other major revenue streams like the various services it offers to third-party sellers, digital advertising, and subscriptions.
Last year, AWS made 16% of Amazon’s rough $514 billion total revenue but, crucially for investors, the cloud business accounted for virtually every dollar of its £12.25 billion operating profit. The retail side is super low margin and has struggled for years to generate profits.
Fund managers and analysts have been hoping Amazon would strip AWS out from retail, including Terry Smith, the founder and lead manager of the popular Fundsmith Equity (B41YBW7) fund. In July, Smith told fund shareholders that he was selling down its Amazon stake primarily because Amazon has been committing too much capital to retail.
Many analysts agree. In a note issued in response to the regulatory probe, DA Davidson analyst Tom Forte, wrote that ‘in the event the government breaks Amazon into three parts; 1) first-party retail, 2) third-party retail, and 3) cloud computing’, that the stock would still likely be ‘worth more on a sum-of-the-parts basis, if the lawsuit ends in the company getting cut into pieces’.
Forte calculates a sum-of-the-parts valuation as much as $193 per share, 48% above the current $129.46 share price.
The legal challenge could take years to get through the courts and appeals process, and Wedbush analysts warned investors that a ‘material change to the company’s structure is unlikely’.
Disclaimer: The author has a personal investment in Fundsmith Equity.
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