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FTC speculation puts spotlight on Amazon's premium valuation

Carlsquare
13. sept. 2023 | 4 Læsetid

Amazon may be facing a lawsuit by the U.S. Federal Trade Commission (FTC). This has put a spotlight on the company's dominance of the e-commerce landscape, as well as its high valuation relative to peers in all sub-sectors. The European Central Bank will announce its interest rate decision on Thursday, 14 September. The Fed and the Swedish Riksbank follow on Wednesday, 20 September. The Fed is expected to keep its policy rates unchanged. Technical momentum is generally fading for the stock indices.

Case of the week: FTC Lawsuit Casts Shadows on Amazon's Dominance in the E-commerce Landscape

Recently, there has been a growing crescendo of speculation about the U.S. Federal Trade Commission's (FTC) antitrust unit preparing to initiate legal action against Amazon concerning its management of the world's foremost e-commerce platform. Speculation suggests that the government is considering potentially dismantling Amazon into separate entities to foster greater competition in the online retail landscape.

Should the company split into several distinct entities, beginning with its e-commerce retail segment, this move could potentially elicit dissatisfaction among current Amazon shareholders concerning their financial outcomes. Such a restructuring might stifle growth rates and introduce fresh accounting, managerial, and marketing expenses for each separate entity, challenging the prompt attainment and sustenance of individual and overall operational profitability.

On the contrary, some argue that Amazon would be better off as several entities, making achieving a 10 – 20 per cent annual growth rate easier than its current structure.

Regardless of whether an eventual split is negative or positive, Amazon's business model, characterised by its ownership and control over a substantial portion of the online retail marketplace, is currently facing mounting scrutiny and challenges.

Looking at valuation, the Amazon share is currently trading at $138. Although this is lower than the all-time high of $186.6, the share price has increased by 64% year to date. Amazon's share price can be seen as inflated compared to various peers. Amazon can be classified within several sectors, from tech to goods delivery. In our peer group, we have chosen tech (Microsoft, Apple, Alphabet and Meta), retail (Walmart and Target), and goods delivery companies (FedEx and UPS). As shown in the chart below, Amazon trades at significantly higher levels than its peers, regardless of sector, with a staggering next twelve months Price-to-Earning (P/E) ratio of 68.3x.

Figure 1. P/E NTM AMZN and Peer group. Source: CapitalIQ

For the tech companies, the average next twelve months P/E is currently 24,1x. The retail companies showcase an average next twelve months P/E of 20.7x, while the goods delivery players come in at 14.8x.

Regarding profitability, Amazon's profit margin last twelve months amounts to 8.3%. Amazon's profitability is low compared to the tech companies, which, on average, showcase 27% in profit margins. Compared to UPS (9.44%) and FedEx (7.01%), Amazon is pretty much on point, while the profitability is lower for Walmart and Target (average 2.4%).

Figure 2. Profit margin LTM AMZN and Peer group. Source: CapitalIQ

The share price is arguably high regardless of which sector investors place Amazon in. The market seems to have largely overlooked the potential FTC antitrust lawsuit against Amazon thus far, with Amazon's stock maintaining its high valuation. Given the FTC's lengthy investigation, it is likely that they will proceed with the lawsuit. Consequently, Amazon's shares may experience increased volatility in the foreseeable future, with an underlying downside risk.

Amazon stock price chart (in USD), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Amazon stock price chart (in USD), five-year weekly chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Macro comments

US interest rates fluctuated last week but rose on Friday, the 8th of September. Today, Wednesday the 13th of September, investors will focus on the US August Consumer Price Index. Tomorrow, on Thursday, the 14th of September, US Producer Price Index figures for August are due. The Fed's next meeting is scheduled for Wednesday, the 20th of September. The market is pricing over a 90% chance that the Fed will leave its policy rates unchanged.

The probability that the European Central Bank will raise its policy rate on Thursday, the 14th of September, is around 40%, while the Riksbank is expected to raise the Swedish policy rate on the 20th of September with a 90% probability. Swedish Consumer Price Index figures for August will be released on Thursday, the 14th of September.

US 10-year yield (%), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

US 10-year yield (%), five-year weekly chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

On Thursday morning, 14th September, Japan's Machinery Orders and Industrial Production for July are due.

On the morning of Friday, 15th September, we will get statistics from China on the country's industrial production, investment, retail trade and unemployment in August. The US Industrial production for August is due later on Friday afternoon.

Momentum is fading

S&P 500 is struggling to maintain the positive momentum, as illustrated by MACD. The index is currently trading down below EMA9 but above MA20. A beak below MA20 and MA100, currently at 4,365, may be next.

S&P 500 (in USD), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Also, MACD has generated a soft sell signal in the weekly chart below.

S&P 500 (in USD), weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq 100 is also struggling to keep the positive momentum going.

Nasdaq 100 (in USD), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Again, MACD has generated a soft sell signal in the weekly chart.

Nasdaq 100 (in USD), weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 did not break up above MA200 and is trading downwards along the ceiling of a falling trend channel.

OMXS30 (in SEK), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

As shown in the weekly chart below, MACD generated a sell signal some time ago.

OMXS30 (in SEK), weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX looks somewhat scary as the index is testing the support around 15,700 again. The next level on the downside is made up by MA200, currently just below 15,500. In case of a break below this level 15,000 may be next.

DAX (in EUR), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX (in EUR), weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The gold price is approaching MA200 after a failed attempt to break up above the ceiling of a falling trend channel. Meanwhile, the EUR/USD may have bottomed out for now. A weakened USD may fuel yet another upward move in gold.

Gold (in USD per troy ounce), one-year daily chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Gold (in USD per troy ounce), weekly five-year chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

Risici

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