With big tech facing sluggish growth and an adverse economic outlook that could prevent them from regaining market dominance, increased antitrust scrutiny would seem to be the last thing they need. But some investors disagree.
Breaking up these big tech companies is unlikely at the moment, but it’s not an empty question. It has become a common goal of both parties to examine them for antitrust. Last week, the US President called for legislation to crack down on big tech. It also means that for the first time since 1979, the word “antitrust” was used in a president’s State of the Union address.
Breaking up big tech companies could unlock the value of companies like Amazon or Alphabet, both of which have strong businesses but whose potential is obscured by their sprawling corporate structures. Proponents argue that if it were broken up into separate businesses, the combined value of shares in the new company could be greater than that of the current parent.
“Amazon and Alphabet have been underperformers, and breaking up their businesses would provide the most value release,” said Eric Clark, a portfolio manager at investment firm Accuvest Global Advisors.
Clark expects Amazon shares to rise 50 per cent if split up, while Alphabet shares could rise as much as 30 per cent. Both stocks have underperformed the Nasdaq 100 since the start of last year. Alphabet shares have tumbled in recent days on concerns that Microsoft’s AI initiatives could undermine Google’s dominance in search.
Earlier this month it was reported that the US Federal Trade Commission (FTC) was preparing an antitrust case against Amazon. Last month, the Justice Department joined eight states in suing Google to break up its advertising technology business.
Mr Clarke said: “I would welcome more action from regulators on the antitrust front as it could allow these companies to shake off the laggard and provide investors with a better range of options. I would rather go for individual new businesses after the spin-off.”
Laura Martin, an analyst, believes Alphabet will be more valuable after it is broken up than it is today and would welcome a regulatory breakup of Google. Martin predicted that a breakup of Alphabet could boost the stock price by 10% to 20%. If traded separately, YouTube would have a market value of $300 billion, almost twice the value of Netflix.
Amazon has three businesses: e-commerce, Amazon AWS Cloud services and advertising services. The size of each business dwarfs most others. AWS, for example, generated $80 billion in revenue last year, equivalent to Procter & Gamble’s total sales.
Bloomberg Intelligence estimates AWS could be worth between $1.5 trillion and $2 trillion, while some other estimates go as high as $3 trillion. By comparison, Amazon as a whole is currently worth only about $1 trillion.
And even if the companies are undervalued, the prospect of protracted litigation or anti-tech legislation could weigh on sentiment towards the stocks. And antitrust action could hit the companies’ core profit sources or areas of growth.
Apple’s place in the mobile ecosystem is currently under investigation by antitrust regulators in the UK. Meanwhile, Justice Department lawyers are drafting an antitrust case against Apple. Analysts say there is a real risk of lawsuits against Apple’s App Store.
In addition, regulators in many countries have questioned Microsoft’s acquisition of Activision Blizzard on competition grounds. Denny Fish, an executive at an asset management firm, says it’s a tough question for these companies.
