Washington, hopelessly divided on countless critical issues, has found a common enemy in Big Tech. That bipartisan backlash poses a threat to the epicenter of the decade-long bull market.
Facebook (FB), Google owner Alphabet (GOOGL), Amazon and Apple (AAPL) tumbled on Monday after media reports revealed that US regulators have laid the groundwork for potential antitrust investigations of these dominant tech companies. Those stocks rebounded on Tuesday, though only Apple (AAPL) recovered its losses.
The scary headlines, on top of the global trade war, open a Pandora’s box of outcomes that investors can’t easily quantify. Will the government try to break Big Tech companies up? Will Congress write tough new laws? Or will this all go away with some easily paid fines?
“The leaders of this bull market are now under threat,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients. “The US government is going after our most successful companies for being too successful.”
But investors would be wise not to panic.
These are cash-rich companies that can afford to pay even the fattest of fines and go head-to-head with the federal government in a drawn-out legal war. And some analysts are skeptical that regulators would be able to prove an antitrust case.
“I wouldn’t short these companies. I’d go long on the law firms with antitrust experience. Those are the guys who will get rich on this,” said Jonathan Macey, a corporate finance and securities law professor at Yale University.
But that doesn’t mean Big Tech will get away unscathed.
Enough people are angry at them on both sides of the aisle — the Democratic-led House Judiciary Committee is launching its own antitrust investigation of tech — that there will likely be negative consequences for Big Tech. And the lingering question marks will create an overhang on the stocks for the foreseeable future.
“It’s a headache — and it’s going to remain a headache,” said Ian Winer, an advisory board member at investment bank Drexel Hamilton. “But whatever it is, it’s not going to be the end of the world. I don’t think you need to sell.”
Investors seem to agree with that thinking, as evidenced by the 2% surge in the Nasdaq on Tuesday.
‘DC is playing a risky game’
What happens next has broad implications for investors.
Not only have Facebook, Google, Amazon (AMZN) and Apple been at the heart of the bull market, but they are embedded in just about every individual investor’s portfolios and retirement accounts.
And given their enormous size — the big four account for about 11% of the S&P 500’s entire value — their fate is inextricably linked to that of the broader markets.
“DC is playing a risky game here,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients. “Do material damage to their stock prices and you risk setting off a broader market selloff at a time when investors are already fretful.”
Breaking up tech won’t be easy
History shows that the government has a mixed track record, at best, when it comes to breaking up large corporations.
While the government successfully sued in 1974 to break up AT&T (T), that case took eight years to settle. After AT&T (T) was broken up, one of the Baby Bells acquired AT&T (T) and took its former parent company’s name. CNN is now owned by AT&T (T).
And Microsoft (MSFT) is still standing after a four-year antitrust battle with the Justice Department was settled in 2001. Today, Microsoft (MSFT) is worth more than $900 billion and last year it even briefly reclaimed its title as the world’s most valuable company.
Ed Yardeni, president of investment advisory Yardeni Research, shrugged off the latest iteration of antitrust efforts as “populist pandering,” not an existential threat to the companies.
“If there are grounds for doing anything, it will turn out mostly to be a fine or a slap on the wrist,” said Yardeni. “I don’t see the need to break up Facebook, Google or Amazon. How would you do that — and why?”
Facebook, which has been accused of mishandling personal data, would be the most obvious candidate for a breakup because its empire was built through the acquisitions of different platforms: Instagram, WhatsApp and Oculus. In theory, those purchases could be reversed — an idea backed by Senator and presidential candidate Elizabeth Warren and others.
Still, analysts say it may be difficult for the government to prove that consumers have been harmed badly enough to justify break-ups.
“If you tell most people they can’t use Google, they’d probably freak out,” Yardeni said.
Investing in next-generation technology
Big Tech has unfathomable resources to fight back against antitrust efforts. Facebook and Alphabet alone are sitting on more than $150 billion in cash combined.
“The general counsels of these companies are in touch with legions of lawyers all over the world. The troops are being mustered to wage war,” said Macey, the Yale professor.
Wall Street would cheer if tech companies simply had to pay large fines.
Shares of Facebook, for instance, spiked 6% after announcing in late April that it could pay a fine of up to $5 billion to the Federal Trade Commission.
“If these companies came out tomorrow and paid a massive fine — even 20% of the cash they have — the stocks would rally,” said Winer.
Bigger picture, US regulators don’t want to come down too hard on Big Tech because it could stifle innovation at a time when America is facing enormous competition from China. The top six tech and internet companies spent $104 billion last year along on R&D in the United States, according to UBS. They invested heavily in artificial intelligence, machine learning and quantum computing — next-generation technology that will fuel tomorrow’s global economy.
“Some regulation is fine,” Colas wrote, “but too much could threaten US preeminence in new technologies.”