The stock market has benefited handsomely from the performance of technology juggernauts.
For 2020 year to date, Amazon, Apple, Facebook, and Google have helped the NYSE FANG+ index generate a better than 122% return from the March 18 lows through the Oct. 7 close.
But valuation multiples don’t grow to the sky, and 2021 may not be as kind to the tech juggernauts. Regulatory risk and political risk are rising threats, and could cut into revenues and profits for the Big Four. And in the halls of the U.S. Congress, there are calls for breaking them up.
On Tuesday, Oct. 6, the House Antitrust Subcommittee released a 449-page report titled “Investigation of Competition into Digital Markets.” You can access the report here.
The report concludes an exhaustive 16-month investigation into the anticompetitive practices of Amazon, Apple, Facebook, and Google. The findings are incredibly harsh.
“These firms have too much power,” the report concludes, “and that power must be reined in and subject to appropriate oversight and enforcement. Our economy and democracy are at stake.”
The report further sees “a clear and compelling need for Congress to take action,” and accuses Amazon, Apple, Facebook, and Google of running “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”
The report accuses the Big Four of engaging in “killer acquisitions,” a means of preserving power and stifling innovation by purchasing any competitor that smells like a threat.
To remedy the situation, the report recognizes a roster of actions, including a separation of business lines and a series of mandatory breakups.
The proposals are reminiscent of the 1911 legislation that forced the breakup of John D. Rockefeller’s Standard Oil into dozens of smaller companies, or the breakup of AT&T into the seven “Baby bells” in the early 1980s.
If even a modest portion of the report’s recommendations are followed, it could mean the biggest antitrust push since the government went after Microsoft in the 1990s. The report could also bring about a new era of merger scrutiny, and open the door for additional antitrust actions.
In addition to stifling competition through buyouts, the report focuses on the role of the Big Four as “platform companies,” in the sense that each serves as a platform that smaller businesses make use of.
The report recommendations include restricting a company’s ability to both run a platform and compete in the markets served by that platform. This is a bit like saying that, if you run the biggest bar in town, you can’t own a brewery too, because your beer would have an unfair advantage.
Much of the report’s 449 pages are devoted to an exhaustive rundown of monopolistic behaviors on the part of Amazon, Apple, Facebook, and Google. Of the four, they seem to come down on Amazon the hardest, in part due to Amazon’s competitive relationship with the third-party sellers in its marketplace.
Whether or not the tech juggernauts actually get saddled with new rules — or even subjected to breakup, in the manner of Standard Oil or pre-1980s AT&T — probably depends on the state of political control in Washington.
If Democrats achieve a “Biden Sweep,” for example, with unified control across the White House, Senate, and House of Representatives, the odds rise significantly of seeing follow-through actions with teeth.
Whether or not they get broken up, the proposed remedies for the tech juggernauts’ monopoly power are a threat to their outsized revenues and profits.
The logic here is straightforward: Each of these companies is pursuing a rational path to profit maximization, taking legal advantage of its competitive position as aggressively as possible. Congress wants to shift a chunk of current behaviors and practices from the legal column into the non-legal column, which would hurt both the top and bottom lines.
If antitrust enforcement results in greater levels of innovation, competition, and consumer choice — as arguably occurred with Standard Oil and AT&T — then consumers and investors alike could benefit from reining in the juggernauts.
But in the medium term, the share prices of the Big Four tech companies look vulnerable to rising political and regulatory risk. This is in part because their inflated valuation multiples have an “only game in town” aspect: If Congress succeeds, then almost by definition they won’t be the only game in town anymore, or will otherwise be less able to exploit their dominant platform advantages.
That could mean a downward re-rating in terms of valuation multiples, which could lead to substantial share price declines even if revenue and profit outlooks remain the same.
Given this reality, rising political and regulatory risk makes it all the more important to respect the message of the trend, and to not be complacent if the bull trend in any of these names starts to break down in earnest.
