Amazon, Alphabet antitrust push seen unlocking value in shares
With big tech companies facing weaker growth trends and an economic outlook that could prevent the group from regaining its leadership role in the market, revived antitrust fervor might seem to be the last thing they need. Some investors disagree.
While a breakup of megacaps could be an unlikely scenario, and one that could take years to play out in the legal system, it isn’t an idle question. The group is a bipartisan target, and President Joe Biden last week called for legislation targeting big tech; his State of the Union speech marked the first time the word “antitrust” had been used in the annual address since 1979, according to historical records.
Breaking up big tech could unlock value in companies like Amazon.com or Alphabet, both of which have powerhouse businesses whose potential is obscured in their sprawling corporate structure. If those were spun out into pure plays, the thinking goes, the new families of stocks could be worth more together than the combined entities are now.
“Amazon and Alphabet have been serial underperformers, and the greatest unlocking of value would come from splitting up the businesses,” said Eric Clark, a portfolio manager at Accuvest Global Advisors. He estimated Amazon’s stock would be 50% higher if the company were broken up, while Alphabet could have upside of as much as 30%.
Both stocks have underperformed the Nasdaq 100 Index since the start of last year, with Google parent Alphabet recently slumping on concern that Microsoft’s artificial intelligence initiatives could undermine its search dominance. On Monday, Amazon fell 0.1% and Alphabet was little changed. The Nasdaq 100 gained 0.2%.
The U.S. Federal Trade Commission is preparing a possible antitrust lawsuit against Amazon, Bloomberg News reported this month. The company declined to comment at the time.
Last month, the U.S. Justice Department joined with eight states in suing Google, calling for the breakup of its ad-technology business. Alphabet said the case is based on “a flawed argument” that would result in slower innovation and higher ad fees that will hamper small businesses.
“I would welcome more action on the antitrust front, since it might get these companies to get off their behinds and offer investors a bunch of great options,” said Clark. “I’d rather pick and choose what parts of the business I want allocation to, rather than getting a sum-of-the-parts conglomerate discount.”
Analysts see limited financial risk for Alphabet from the suit, and Needham has been positive on such prospect.
Alphabet “is worth more in pieces than together, so we welcome regulators’ attempts to break up GOOGL,” wrote analyst Laura Martin, who estimated that breaking up Alphabet could drive upside of 10% to 20%. She calculated that YouTube would be valued at $300 billion if it were separately traded, nearly double the market capitalization of Netflix.
Amazon boasts three businesses – e-commerce, Amazon Web Services, and advertising services – that each dwarf the size of most other companies. In 2022, for example, AWS generated $80 billion in revenue, comparable to the total sales of Procter & Gamble.
Last year, Bloomberg Intelligence calculated that AWS could be worth $1.5 trillion to $2 trillion, while other projections have reached as high as $3 trillion. While the division’s growth has slowed since then, Amazon’s market value now is $1 trillion, suggesting that even if AWS is worth less than those earlier estimates, investors are getting the other businesses for close to nothing.
Of course, even if these companies are being undervalued, the prospect of lengthy litigation or anti-tech legislation would likely weigh on sentiment toward the stocks. In addition, there is a threat antitrust actions could hit at core profit centers or growth areas.
The U.K. antitrust watchdog is investigating Apple’s position in the mobile ecosystem, while Department of Justice lawyers are reportedly drafting an antitrust complaint against Apple; Bloomberg Intelligence sees a risk of litigation over the company’s app store. Regulators have also challenged Microsoft’s proposed acquisition of Activision Blizzard Inc. on competitive grounds.
“It’s become hard for these companies to do an acquisition that can alter their growth profile or extend their competitive advantage in core markets, and right now that’s a bigger antitrust risk than the idea they may be forced to spin off businesses,” said Denny Fish, who manages the $4.3 billion Janus Henderson Global Technology and Innovation Fund.
He added that the issue is a difficult distraction for companies like Alphabet.
“There’s an internal code red because everyone is worried about AI, and on top of that you have to fight the government about your core search business?” said Fish. “This is more top of mind for investors than it has ever been.”