- Big tech stocks like Alphabet,Apple, and Facebook have come under pressure amid reports of federal probes around antritrust issues and data privacy concerns.
- It’s unclear whether the companies’ stock prices will suffer in the long run as u ncertainty surrounds the scope of the probes.
- But market strategists and legal experts are warning big-tech investors face major risks.
- Visit Market Insider’s homepage for more stories.
Federal regulators are knocking at Big Tech’s door.
The US Federal Trade Commission will oversee any antitrust probe into whether Facebook‘s practices hurt competition into the digital market, the Wall Street Journal reported earlier this month. The news sent the social network’s shares plunging and dragged the entire technology sector lower.
Alphabet and Apple saw their stocks fall on similar press reports the same day that the US Department of Justice was preparing antitrust probes into each company. Meanwhile, Sen. Elizabeth Warren – the Massachusetts Democrat and US presidential candidate – proposed earlier this year a plan to break up big tech companies including Amazon, Google, and Facebook.
While it remains to be seen whether reported probes and proposals into antitrust matters and privacy concerns will mark a death knell for the likes of Facebook and Google parent Alphabet– as the exact scopes of the probes remain unclear – experts are warning against investors shrugging off possible risks.
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“From a strategic perspective, we believe that uncertainty is still too high to recommend investors avoid stocks in the regulatory spotlight,” Goldman Sachs strategists led by Ryan Hammond said in a Tuesday note.
They added: “But while the impact of regulation on today’s stocks will be case-dependent, similarities among historical outcomes suggest that investors should reduce exposure to any stock that becomes subject to an antitrust lawsuit.”
The strategists pointed to past regulatory events, with shades of today’s concerns, that ushered in material business losses.
For example, Microsoft‘s 1998 antritrust lawsuit ultimately led to a reversed court-ordered breakup and a settlement with the Department of Justice. The corporation then saw “substantially” lower sales growth following its 2001 consent decree that expired a decade later, according to Goldman. Meanwhile, they found IBM‘s antitrust lawsuit in 1969 kicked off a “steady decline” in revenue growth and margins.
Other investment firms are highlighting similar risks of which investors should be cognisant, even as the extent of various regulatory bodies’ probes is a wildcard.
As issues like data security and the overall health of technology platforms becomes increasingly prevalent, companies face a “higher cost of doing business,” Morgan Stanley strategists wrote in a late-May report.
“Outside of China, the risk of regulation limiting foreign investment in local companies may present a headwind to international growth and profitability for some of our companies,” they wrote.
On the company level, the firm said the cost of compliance and regulatory overhang will remain a risk for Facebook and Alphabet, while Amazon may face “growing protectionist regulations” eating into potential international growth.
“Each government has its own nuanced approach to these issues and our universe may have to adapt to an environment in which protectionist/nationalist behaviours drive decision making as national regulatory and tax regime differences become more stark,” the strategists wrote, adding that political rhetoric leading up to the 2020 US presidential election may inject volatility into the space.
Some experts are sceptical big-tech companies will face breakups, but say risks still abound.
Court mandated break-ups have been infrequently implemented in US history and are unlikely to be seen here, according to Glenn Manishin, a managing partner at ParadigmShift Law and a former trial attorney for the DoJ’s antitrust divison. He worked on the US vs. AT&T and Microsoft cases.
Facebook runs the highest risk of a split relative to other big-tech companies given its Instagram acquisition, followed by Google, Apple, then Amazon, Manishin said on a conference call this week with Instinet analysts.
Specifically, the fact that Google’s case started in the FTC and is now in the DoJ could have negative implications given the latter unit’s focus on monopolization claims and the former’s focus on unfair methods of competition.
The risks hanging over big tech were underscored this week when Makan Delrahim, the assistant attorney general in the Department of Justice’s antitrust division, addressed the matter at a conference in Tel Aviv, Israel.
“The Antitrust Division does not take a myopic view of competition,” Delrahim said. “Many recent calls for antitrust reform, or more radical change, are premised on the incorrect notion that antitrust policy is only concerned with keeping prices low. It is well-settled, however, that competition has price and non-price dimensions.”
The DoJ has “the tools we need to enforce the antitrust laws in cases involving digital technologies,” he added, and said US antitrust law is flexible enough to apply to “markets old and new.”
This sent alarm bells off for Nicholas Colas, a veteran analyst and co-founder of DataTrek Research. Investors should get ready to hear Delrahim’s name “a lot more,” he told clients in a note this week.
“It’s hard to read this speech and not think the Justice Department is lining up its arguments for a showdown with Big Tech,” Colas wrote. “What comes from that is anyone’s guess.”
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