Amazon Sued by FTC

Photo Credit: Saul Loeb/Getty Images

The FTC has recently dropped the gavel on a litigious move which may potentially mean a substantial downward trend to Amazon (AMZN) shares. Investment in Amazon has always come with standard caveats such as increasing competition, profit potential uncertainty, revenue growth uncertainty, speculative valuation and share price volatility. Well, it seems that they have created a bulwark in their exposure to competition through their very existence. Last month the FTC (Federal Trade Commission) and 17 state attorney generals sued the tech giant for its use of anticompetitive and unfair strategies.

According to a statement from the FTC and its state partners, it is alleged that Amazon stops rivals and sellers from lowering prices, degrades quality, overcharges sellers, stifles innovation, and prevents rivals from fairly competing against them.

According to the September 26 complaint filed in the U.S. District Court of the Western District of Washington, “Amazon has hiked so steeply the fees it charges sellers that it now reportedly takes close to half of every dollar from the typical seller that uses Amazon’s fulfillment service. Amazon recognizes that sellers find that it has become more difficult over time to be profitable on Amazon”.

This comes after a suit filed by Amazon in March that states that the online retailer is taking action against third parties that have sold counterfeit products on the platform. An order signed by a chief judge at the same district court in Washington states, “Based on the nature of these actions and Amazon’s stated intentions, the district expects additional Counterfeit Enforcement Actions will be filed with some regularity and frequency in the next couple of years (and possibly beyond).”

Based on the FTC statement, the main focus is that the company “engages in a course of exclusionary conduct that prevents current competitors from growing and new competitors from emerging.”

Upon the announcement, Amazon stock dropped 4%. With the allegations against the company there may be a breakup to mitigate conflicts of interests. Perhaps, the outcome will be a separation of their services into multiple parts. Including online and physical stores, subscription services, third-party seller services, advertising, and Amazon Web Services (AWS). However, even with a breakup into a conglomerate and a complete quality control overhaul, this wouldn’t keep consumers from using the service and it wouldn’t prevent Amazon from overcharging sellers and contributing to predatory practices.

This would, however, change the company’s overall valuation (Price to Sales). With a current market cap of $1.3 Tn and TTM (Trailing Twelve Month) revenue at roughly $500 Bn, that’s a 1.6 P/S valuation. This breakup would change, and in certain cases, increase the P/S (Price to Sales) for certain services they offer that are not as competitive or in demand. A more accurate valuation.