Amazon.com, Inc. (AMZN.US) has undergone a rapid change in its luck. Just under two weeks ago, the shares reached their 52-week high at $145.84 and have sharply reversed since then, first due to general market weakness and then due to the Federal Trade Commission's (FTC) antitrust case, which we will discuss below. As a result, the shares have dropped almost 16% in a short period.
Amazon's (AMZN.US) performance in 2023, D1 chart. Source: xStation
An antitrust case by the FTC must be taken seriously. In this case, the accusations are strongly worded. For example, the following statement is perhaps the most striking, as it alleges that Amazon has not only been engaging in illegal practices for a long time but that each tactic reinforces itself in a cycle, which can be interpreted as a blow to the Amazon ecosystem.
"Throughout its prolonged illegal conduct, Amazon has deeply rooted its monopolies and has further widened the gap between Amazon and everyone else. Each tactic amplifies the force of the rest, in a self-reinforcing cycle of dominance and harm."
However, could the market have overreacted to the FTC news? Especially when considering the fact that the overall market has been weak in recent weeks and has only had one positive day in the last 5 trading days. It seems so, and that's why we will explore several reasons in this analysis that may support this thesis.
FTC History
Once again, the FTC exists for a reason. The strong shouldn't get stronger at the expense of the weak, and the market should be fair to everyone. Fair point and understood. However, there is a reason why mega-cap companies became mega-cap companies, surpassing many times what was once an unimaginable barrier with market caps of $1 trillion. Should we believe that they (large companies) never knew the threat of the FTC if they became so big? Besides the panic, what is the major hindrance here? What is the FTC's history against large companies? What is the largest fine the FTC has ever imposed? The burden of proof lies here with the FTC, and it is especially difficult to prove liability to the extent that may actually harm these large companies.
Let's remember the case against YouTube (GOOG.US and GOOGL.US) alleging that the company collected personal information from children (a more serious accusation in my opinion than unfair business practices). It ended with Google paying a minuscule fine of $170 million. While $170 million is huge in any other imagination, it is a small drop (0.017%) for a $1 trillion company (0.012% for $1.34 trillion specifically).
Getting Even Bigger
While the FTC and many others argue that Amazon is already too big to benefit anyone (except Amazon), and there are several industries that Amazon could disrupt. These industries range from healthcare, where Amazon is already establishing itself, to luxury goods. If you think about it, Amazon already has the most important ingredient to succeed in almost any business it undertakes: the distribution system. Regardless of how the FTC case ends, this underlying business strength will not disappear from Amazon and its investors, even if it results in the division of the company into different entities.
Strong Projected Earnings Momentum
Shifting gears a little, Amazon is expected to report its quarterly earnings in the last week of October, and analyst estimates favor the stock even at its most conservative price target. Additionally, 24 out of 25 earnings per share (EPS) revisions and 31 out of 31 revenue revisions have been upward. More specifically, the EPS estimate for the third quarter of fiscal year 2023 has increased from $0.45 earlier this year to $0.58 more recently. Even with the FTC cloud over the stock, the cloud that will likely matter more in a few weeks is the one that Amazon will report on and is covered below.
Analyst consensus on Amazon's results. Source: Seeking Alpha
Could the FTC Accelerate an AWS Spin-Off?
We have already discussed in previous analyses that just by the existence of Amazon Web Services (AWS), the company remains an attractive option to enter the stock (AMZN.US) today. Recent history has made it clear that AWS contributes much more than its fair share to Amazon's overall profit margins. Although the FTC says that this antitrust case is not about how "big" Amazon is but its "exclusionary conduct," their eyes are completely on it.
The purpose of building an ecosystem is to leverage your own platforms. Imagine Apple, Inc. (AAPL.US) being sued because iTunes works more seamlessly with an iPhone than with a Motorola Razr.
AWS operating profit vs. competitors. Source: fourweekmba.com
Stock Valuation
Amazon's stock has always been a forward-looking story. When retail was making money, the company (unknown to the outside world) invested the profits in AWS. Although AWS is still performing well, the company has nurtured its advertising segment. What I mean by this is that the future market estimates for a company like Amazon do not seem unreasonable, given its rich history of fostering tomorrow's revenue with today's profits. At $129, Amazon's stock is trading at a forward multiple of x40 based on the average EPS estimate for 2024. When you factor in the expected earnings growth rate of 80% per year (thanks to the base effect from the deceleration in 2022) over the next 5 years, the stock has a price-to-earnings-to-growth (PEG) ratio of x0.50 that would make Peter Lynch proud.
First Technical Reason
Amazon's stock (AMZN.US) has worryingly broken below the 100-day moving average, but the 200-day moving average is not far off, approximately 12.45% below the current market price. Entering the company at current prices comes with reasonable opportunity cost, thanks to this 200-day moving average being quite close.
AMZN.US moving averages. Source: Own elaboration
Second Technical Reason
It is not often that the words "Amazon" and "Oversold" are used together. If anything, this stock has been accused of being among the most overvalued names in the last decade and a half.
However, as the stock's Relative Strength Index (RSI) of 34.4 indicates, the stock is very close to the oversold level and could develop a structure similar to what was experienced earlier this year when this indicator was exactly in the same zone. Source: xStation
Price Target
Lastly, the most enthusiastic analysts for Amazon could show up anytime to defend the stock. This may not move the needle immediately given the overall market conditions, but the fact remains that Amazon's stock is a market favorite. And you don't often see market favorites lagging behind their median price targets by 40%. Even the lowest price target of $140 in a poll of 45 analysts from nasdaq.com is 8% above the current price.
AMZN Price Target. Source: Nasdaq.com
Risks and Conclusion
The company is not exempt from risks. There are quite a few, including the elephant in the room, the FTC. The path with the FTC will be bumpy; there will be "experts" expressing their opinions on how this could permanently damage Amazon, and a significant amount of prolonged legal discussions between the FTC and Amazon. Other risks include the slowdown of AWS and the overall economy, which appears unstable, impacting Amazon's growing advertising stream. However, the land of opportunities did not earn its name and fame by stifling growth, no matter how threatening that growth may seem to other stakeholders and even the government.
In the worst-case scenario, we can expect fines and/or settlements that may not even affect Amazon in the grand scheme of things and the potential division of the company, which may not be a bad thing in the long run.
Darío García, EFA
XTB Spain
