We are maintaining our fair value estimate of $150 per share for Amazon.com (AMZN), even as the US Federal Trade Commission has been joined by 17 state attorneys general in filing a lawsuit against the company for a variety of alleged anticompetitive practices. Our initial opinion is that a settlement is the most likely outcome, with a fine being levied and possibly some minor changes in Amazon’s business practices. We are highly skeptical of the idea that the firm could be broken up. Shares still appear modestly undervalued to us.
The legal filing seeks unspecified remedies but appears to skew toward structural changes rather than fines, and it may seek to break up Amazon. We struggle to come up with a recent relevant precedent for such a move, as US courts have been applying a framework that revolves around consumer welfare for more than four decades. In this case, it is difficult to see how breaking up Amazon would clearly benefit US consumers. Regardless, we think this legal matter will take years to wind its way through the courts.
In the highly unlikely event of a breakup, it is possible that new investors may focus on certain parts of the business (like AWS), and the sum of the parts might be greater than the whole. However, our wide moat rating for the retail business is based on cost advantages, intangible assets, and network effects, and that would clearly be threatened, depending on the exact nature of such a breakup.
Nonetheless, we think the most likely outcome is a settlement that involves Amazon paying a relatively small fine and ceasing certain business practices. The largest fine ever levied by the FTC was for $5 billion on Facebook in 2019. A $5 billion fine would be less than 1% of Amazon’s market cap. To date, we have seen various governments around the world attacking mega-cap tech companies without achieving a win that materially affects any of these businesses, so we don’t believe this action against Amazon will be meaningfully different.
