The antitrust investigations targeting American big tech companies appear to be once again gaining momentum, but analysts are not overly concerned with the spectre of intervention and don’t believe it should affect the outlook for four of the five FAANG stocks.
Google LLC parent Alphabet Inc., Amazon.com Inc., Apple Inc. and Facebook Inc. are facing increasing pressure in both the United States and the European Union over the business practices they employ to dominate their markets as questions are being asked about whether they harm both consumers and competition.
The legal issues are coming on multiple fronts. The U.S. House of Representatives has requested that the respective chief executives testify in Congress in its probe. The Department of Justice is reportedly getting ready to file antitrust lawsuits against Google over its control of advertising. And the EU is targeting Apple over the large revenue cuts it takes from subscriptions generated by third-party apps in its App Store.
The potential consequences might be damning, with everything from fines that could equal 10 per cent of a company’s annual revenues to regulatory changes that break up their monopolies possibly on the table.
Yet, analysts aren’t concerned.
“There are things that are far more dangerous to Google’s economic outlook in the next six months,” said Needham & Co. analyst Laura Martin, pointing out the company generates 35 per cent of its revenue from struggling areas such as travel, cinemas and hotels. “Regulatory risk is not in the top three risks for Google in the second half of 2020.”
Investors appear to agree with her. Amazon, Apple and Facebook have each hit all-time highs in June. Alphabet is the only laggard in the group, but it is only a seven-percentage-point rally away from hitting an historic mark of its own.
There are things that are far more dangerous to Google’s economic outlook in the next six months
Because of the upcoming U.S. election, Martin doesn’t think the American hearings will take place in 2020 as the focus for both political parties will be elsewhere. Even those who believe the hearings will take place this year aren’t putting much substance behind them.
Hans Albrecht, a portfolio manager at Horizons ETFs Management (Canada) Inc., said the hearings in the U.S. and any penalties that come from them will be “for show.” Any fines levied on these companies will not make much of a dent in the billions they generate in revenue.
He also doesn’t think the U.S. will want to weaken its major technology players as China becomes a more dangerous threat to the country’s dominance in innovation and technology.
“I think you’re going to get some posturing and some appeasing, but these companies are going to remain powerful,” Albrecht said.
These companies are going to remain powerful
That’s certainly the precedent that has been set in the U.S. For instance, Microsoft Corp. faced a similar probe in 2000 and was initially ordered to break up, but it avoided that fate after an appeal went its way.
Albrecht is confident in the long-term thesis for each of the four big tech companies and suggests investors should look to buy more shares if prices slip during the eventual hearings that will most likely be broadcast around the world.
But declining share prices might not be in the cards if Facebook chief executive Mark Zuckerberg’s 2018 testimony in front of the U.S. Senate is any indication. Facebook shares actually rose by five per cent during the process.
Wedbush Securities analyst Daniel Ives said the investigations in Europe are no different.
“When it comes to fines for big tech companies coming from Europe, they’ve become almost as commonplace as a cup of coffee in the morning,” he said.
But Ives cautions investors against immediately dismissing the investigations being conducted by the U.S. Department of Justice. “There’s more meat on those bones,” he said.
The biggest change that Ives sees coming as a result of the investigations could cause some stress on how these companies perform mergers and acquisitions, he said.
Investors are already seeing competition regulators put a brighter spotlight on Facebook’s deal to purchase Giphy and Alphabet’s move for Fitbit Inc. Going forward, these deals may face long delays and may not even get approved, Ives said.
But that still won’t make a difference in how he evaluates companies such as Apple.
“We haven’t factored in any major business model changes from this latest round of regulatory scrutiny,” Ives said. “The risk factor is contained.”