Amazon primed for battle with anti-trust regulators
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Amazon primed for battle with anti-trust regulators

It’s here: Politicians have been itching for greater oversight of big technology. Now the wheels have been set in motion.

The Washington Post reported Friday that the Federal Trade Commission and Department of Justice divvied up oversight of Amazon.com (AMZN) and Alphabet (GOOGL). The implication is investigation is coming.

Investors should worry.

Although these processes have probably been underway for some time, news of greater oversight comes as Amazon is reportedly looking to enter the wireless market through the possible purchase of Boost Mobile.

The prepaid wireless provider is up for grabs because T-Mobile (TMUS) and Sprint (FON) are pledging to divest Boost as part of their $26.5 billion merger plan. Analysts believe the Irvine, Calif., business has 7 million to 8 million subscribers in the U.S. and Australia, and might fetch $4.5 billion if radio spectrum is included.

Some have speculated Amazon is gathering wireless spectrum for future autonomous delivery drones and vans. It’s a controversial bet. One analyst at MoffettNathanson told Bloomberg such a deal would be “batsh** crazy.”

That “crazy” assessment may be short-sighted …

Amazon’s best-in-class ecommerce platform is built around customer service. Its patrons love it so much that 100 million of them are willing to pay a fee just to be members.

For that fee, about $119 per year in the U.S., Amazon Prime customers get two-day delivery, unfettered access to digital TV shows and movies on Prime Video, music on Prime Music, book exchanges, and deals at Whole Foods, the 500-store grocery chain that was folded into the Amazon ecosystem in 2017, following a $13.4 billion merger.

Ultimately, Boost may be about wireless spectrum, drones and driverless cars. But it’s even more likely Amazon managers are thinking about how a prepaid wireless provider, with a thriving business in key markets, may also help build Amazon Prime.

Loyalty is what separates the ecommerce giant from the competition. Adding a seemingly discounted wireless business to Prime would make it stickier.

Unfortunately for shareholders, government regulators may be doing the math, too. Putting Amazon.com under the jurisdiction of the FTC means the feds are now going to take a good, hard look at everything.

Since the 2016 U.S. presidential campaign, Jeff Bezos, Amazon’s founder, has become an accidental foe of President Trump. The Seattle billionaire also owns The Washington Post, whose editorial board has been a frequent critic of the president.

In the past, President Trump has lashed out, calling for investigations into Amazon.com. He suggested in 2018 that Amazon.com was scamming the post office. The assessment is factually incorrect, according to a New York Times story, but the damage was done. Bezos and Amazon made it onto a hit list, of sorts.

And there is some reason for investors to worry.

White-label products, goods often manufactured offshore but sold under the Amazon brand, are growing fast. Customers searching Amazon.com for batteries or baby wipes are likely to be directed to an Amazon Basics choice.

Mary Meeker, the famed internet analyst, claimed in 2017 that Amazon sold more batteries than Duracell, and almost as many diapers as Procter & Gamble (PG).

But that’s only half the story.

Since inception, Amazon.com software has been cataloging and data-mining customer purchases. Software engineers and product managers know what items are trending, which are being searched and, most important, what price customers are willing to pay.

It’s a wealth of information that the company has been using to successfully develop white-label products.

TKI Research found in October 2018 that the company had 120 distinct brands, and another 150 Amazon-exclusive brands, including apparel and furniture.

That business, according to a CNBC report, is set to generate $25 billion in sales by 2022, or 3x the current revenues of $7.5 billion.

It’s an unfair advantage over other sellers at Amazon.com.

I have been bullish on Amazon shares for a decade. I have repeatedly told investors to use every dip as an opportunity to add to longer-term positions. The business is that good. However, I acknowledge that greater oversight from the FTC will be a near-term headwind for the stock.

Related post: Amazon isn’t killing retail. It’s just weeding out the mediocre middle.

Amazon’s market cap has swollen to $870 billion. Shares trade at 46.5x forward earnings, and 3.6x sales. This is the richest valuation among big retailers.

Walmart (WMT), for example, has $515 billion in sales, about 2.5x that of Amazon, and its shares trade at 20x forward earnings and 0.56x sales.

Amazon shares could easily trade back toward the $1,600 level over the next several months as regulators begin examining the business. Investors should consider using that weakness, if it comes, to build on existing positions.

Best wishes,
Jon D. Markman

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