Shares of Amazon and Alphabet are Expected to Increase in Value Following the Amazon-Alphabet Antitrust Push

A revival of antitrust fervor might seem like the last thing big tech companies need at this point in time, given that they are experiencing low growth trends and an economic outlook that could prevent them from regaining their lead in the market. There is some disagreement among investors about this matter. 

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There is no doubt that a breakup of mega-caps could be an unlikely scenario and one that would take years to resolve in the legal system, but it is a question that needs to be answered. President Joe Biden made his first State of the Union address in 1979, when he mentioned the word "antitrust" for the first time in that address, according to historical records of the State of the Union address since 1979. Big Tech is a bipartisan target, and last week, President Biden called for legislation targeting that industry. 

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Companies like Amazon.com Inc. and Alphabet Inc., which both have powerhouse businesses whose potential is obscured by their sprawling corporate structures, could benefit from breaking up big tech. Those stocks could be worth more if they were spun off into pure plays, according to the thinking.

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 According to Eric Clark, a portfolio manager at Accuvest Global Advisors, Amazon, and Alphabet have both underperformed for years, and splitting up the companies would be the best way to unlock their value of the companies. As a result, he estimated that Amazon's stock would be 50% higher if it were broken up, while Alphabet's stock could get as much as 30% higher if it were broken up.

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As a result, both stocks have underperformed the Nasdaq 100 Index for most of the past year, with Alphabet, the parent company of Google, recently suffering a slump on concerns that Microsoft Corp.'s artificial intelligence initiative could undermine its dominance in search. The stock price of Amazon dropped by 0.1% on Monday, while the stock price of Alphabet was little changed. There was a 0.2% gain in the Nasdaq 100 index. 

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This month, Trade Algo reported that the US Federal Trade Commission was preparing a possible antitrust lawsuit against Amazon due to its alleged antitrust practices. At the time, the company declined to comment on the matter. 

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The US Justice Department, along with eight states, announced last month that it is suing Google seeking a breakup of its ad technology business as part of the lawsuit. According to Alphabet, the case is based on an "improper argument" that would lead to a slower rate of innovation as well as higher ad fees that would be detrimental to small businesses. 

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“I would like to see more action taken on the antitrust front because it might motivate these companies to get off their backsides so that they can offer investors a lot of great options in the future,” Clark said. "I would rather choose what parts of the business I want the allocation to be allocated to, rather than getting a conglomerate discount on the sum of the parts of the business"

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There is a limited risk of financial damage for Alphabet as a result of the suit, according to analysts, and Needham & Co. has expressed a positive view of the situation.

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“Alphabet is worth more in pieces than it is together, so we respect regulators' efforts to break up GOOGL,” according to analyst Laura Martin. Approximately 10% to 20% of Alphabet's share price could increase as a result of the breakup of Alphabet, according to Martin. If YouTube were traded separately, it would be valued at $300 billion, nearly double Netflix's market capitalization. 

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A company like Amazon boasts three businesses - e-commerce, Amazon Web Services, and advertising services - which each dwarf the size of most other companies in their field. Amazon Web Services, for example, generated a revenue of $80 billion in 2022, which was twice the revenue generated by Procter & Gamble in that year.

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Trade Algo calculated last year that the market value of Amazon Web Services might range between $1.5 trillion and $2 trillion, and other projections have risen as high as $3 trillion. Despite the division's growth slowing since then, Amazon's market value has risen to nearly $1 trillion, which suggests that even if AWS is worth less than those earlier estimates, investors can get the other businesses for a fraction of the price.

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Obviously, even if these companies are undervalued, the prospect of lengthy litigation or anti-technology legislation would likely weigh down the sentiment toward the stocks even if they were undervalued. Furthermore, there is the risk that antitrust actions could have a negative impact on the core profit centers and growth areas of companies. 

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In the UK, the Competition and Markets Authority (CMA) is investigating Apple Inc.'s position in the mobile ecosystem, while lawyers at the Department of Justice are reportedly working on drafting an antitrust complaint against Apple; Bloomberg Intelligence believes Apple's app store may result in litigation. There have also been concerns raised by regulators about Microsoft's proposed acquisition of Activision Blizzard Inc. over its competitive nature. 

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“For these companies, it has become increasingly difficult to acquire companies that can alter their growth profile or increase their competitive edge in core markets, and at the moment, that's a bigger antitrust risk than the possibility that they may have to spin off companies," explained Denny Fish, who manages Janus Henderson's Global Technology and Innovation Fund, which is worth $4.3 billion. 

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There is no doubt that the issue is a difficult distraction for companies like Alphabet, as he stated.

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 “There’s a code red in the company because everyone is concerned about artificial intelligence, and on top of that you have to fight the government over your core business, which is search, ” said Fish. “This is more top of mind for investors than it has ever been.” 

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There has been a rally in Tesla Inc. shares for five consecutive weeks, which is the longest streak since November 2021. Since the stock's intra-day low on Jan. 6 reached Thursday's close, it has doubled in price, and technical indicators were flashing signs that a reversal may be on the horizon. There was a 2.5% drop in the stock price on Monday.