Intensified Antitrust Scrutiny Could Weigh on AMZN Stock

WSJ report could bring lower profits, higher penalties for Amazon stock

Many became concerned about Amazon (NASDAQ:AMZN) stock as an attack on Saudi oil fields sent oil prices (and by extension, delivery costs) soaring. However, a Wall Street Journal report has likely overshadowed that concern due to more intense antitrust scrutiny.

Source: Mike Mareen / Shutterstock.com

Since Amazon stock that has traded in a range for almost a year and a half, AMZN traders could face a longer period of frustration.

Struggles Continue for Amazon

Bad news greeted Amazon as it began Monday trading, and not just because of higher oil prices. AMZN stock fell by over 2% in Monday trading following the WSJ story alleging that Amazon changed search algorithms in such a way that would boost its products. The algorithms also bolstered products that brought higher profits to the company. This move also supposedly caused turmoil within the e-commerce giant as both lawyers and engineers pushed back against these changes.

If proven true, these actions could cause Amazon further pain as both U.S. and EU regulators have investigated the company for both operating a marketplace and selling products within that ecosystem. This action also contradicts years of statements from the company stating that its focus hinged on long-term profitability instead of steering customers to specific products for short-term gains.

The previous quarterly report did not help matters. Amazon beat revenue estimates, however, they fell short on the bottom line and warned that Q3 would likely fail to meet expectations. This news sent AMZN stock back below the $2,000 per share level. It quickly fell close to the $1,800 per share level where it trades today.

Worse, this continues the troubles for Amazon stock, which has become mired in a trading range. For almost 18 months, AMZN has traded at levels between around $1,300 per share and just over $2,000 per share. The current AMZN stock price of just over $1,800 per share places it toward the high end of the range.

Can AMZN Stock Move Higher?

The question for traders is, what can take AMZN stock beyond this range? Unfortunately for Amazon bulls, that path may have narrowed. To be sure, Amazon remains firmly positioned. Amazon Web Services (AWS) continues to produce the majority of company profits. It also maintains its lead over the likes of Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and IBM (NYSE:IBM) in providing cloud services.

Moreover, despite the profit warning for Q3, analysts expect earnings to grow by 17.1% for this year and 40.8% in fiscal 2020. This could support the current forward price-to-earnings (PE) ratio of just under 55 under normal circumstances.

Expect Short, Medium-Term Pain

However, that PE could give traders pause with the antitrust concerns, at least on a short or medium-term basis. Due to the latest allegations, regulators will probably have a stronger case against Amazon. These accusations could lead to anything in between a slap on the wrist or an outright breakup.

Moreover, traders have to assume that the company will remove the algorithms that boosted AMZN profits. I would also surmise that the earnings increases mentioned above will see downward revisions. Paying 55 times forward earnings may not pay off for investors under such circumstances.

Final Thoughts on AMZN Stock

Though higher oil prices could hurt the company, intensified antitrust accusations will likely cause further pain for holders of AMZN stock. The allegations make penalties from regulators on both sides of the Atlantic more likely. Traders can also expect lower profits as antitrust pressure will force a change in the algorithms.

Considering the scrutiny faced by Microsoft in the 1990s and early 2000s, I see a breakup as unlikely. Even if a split occurred, the breakups of Standard Oil and AT&T (NYSE:T) in the 20th century ultimately made the sum of the parts greater than the whole.

However, shorter-term I see the WSJ story as a negative. From a stock perspective, it could lead investors to question whether they should pay almost 55 times forward earnings under these circumstances.

Long-term, I expect AMZN stock will maintain its cloud and e-commerce leadership and post double-digit earnings growth. However, for now, investors should let the dust settle and try to buy later at a lower price.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/intensified-scrutiny-amzn-stock/.

©2019 InvestorPlace Media, LLC