Brace for it, tech bulls.
Those investors who have been conditioned these past five years to only expect big tech stocks Facebook (FB), Amazon (AMZN) and Google (GOOG, GOOGL) to do one thing — go up, and go up huge — may be in for a wake-up call in coming quarters as the newly emboldened Democratic party looks to drop the regulatory hammer on these powerful giants.
“We continue to anticipate that the regulatory overhang for mega-cap internet companies will continue in 2021 and see a breakup of Facebook to be most structurally concerning for investors given a difficult/expensive unwind and that separate Instagram and WhatsApp platforms would likely compete directly for usage and advertisers,” says BofA Securities tech analyst Justin Post.
Post outlines numerous regulatory concerns for investors in Facebook, Amazon and Google, which could collectively weigh on the multiples the already expensive stocks trade on.
“With the Democratic sweep, we see a slightly higher possibility for new legislation that: 1) establishes a Privacy Bill of Rights restricting the use of personal data; 2) re-defines market power in large tech; and, 3) regulates companies as digital utilities,” Post explains. “We also think the Democratic Party-led government will even more strongly support the DoJ [Department of Justice] and FTC [Federal Trade Commission] efforts to break-up Alphabet, Amazon and Facebook. President-elect Biden’s decision to name Bruce Reed (helped craft the landmark 2018 California Consumer Privacy Act) as top technology advisor signals higher probability for the administration to adopt a regulatory agenda focused on consumer policy protection (similar to GDPR in Europe and CCPA in California).”
Post adds the recent insurrection on Capitol Hill will likely renew calls among lawmakers to make social media platforms “more accountable” and also revoke Section 230 of the Communications Decency Act.
The end result of these would-be government actions on Facebook, Amazon and Google, Post argues, may be pressured sales, increased operating costs and outgoing cash flow to pay fines. More often than not, these are conditions for a stock price to lose value as investors recalculate the future of the underlying company.
And the selling could become pronounced.
Enthusiasm for big tech stocks
Facebook, Amazon and Google remain the most owned three tech stocks among large cap active managers, according to Post’s research. In other words, these are some of the most crowded trades on Wall Street that may be unwound quickly as the government sticks a pin in the big-cap tech bubble.
Despite the growing regulatory risks (fueled in part by 38 U.S. state attorneys general in December signing an antitrust lawsuit against Google, as Yahoo Finance’s Alexis Keenan details here) ushered in by the arrival of a Blue Wave in government, the stock prices of tech’s three most scrutinized names continue to be loved on Wall Street.
All three stocks outperformed the S&P 500 (again) in 2020, paced by a 70% rise in Amazon as U.S. consumers relied heavily on the platform during the COVID-19 pandemic. Facebook and Google shares each rose by about 31% last year.
BofA’s Post is still bullish on the stocks, too, even with the mounting regulatory risk he details.
“For all three companies our valuation analysis suggests mega-cap internet is trading at a significant discount to peers and their fair value, and even in revenue reducing breakup scenarios could create value for investors,” Post contends.
But the enthusiasm for big-cap tech stocks — often seen through the prism of the FAANG complex [Facebook, Apple, Amazon, Netflix, Google] — has waned to kick off 2021 perhaps because of the reality that new regulations from a Democratic-controlled government are coming.
Shares of the FAANG stocks are all lower (Facebook is the worst performer, down 8.1%) year-to-date compared to the 1.1% gain for the S&P 500.
Not helping sentiment on big-cap tech stocks right now is the specter of a new $1.9 trillion stimulus plan from the Biden administration. If enacted in any form, the stimulus could lead to a sizable rotation into cyclical sectors of the market from “safe-haven’ big-cap tech stocks.
“The spending comes at an interesting junction for analysts and investors as it will no doubt mean further EPS upgrades. It will also mean that many early cycle S&P 500 sectors will see faster earnings revisions than the popular FAANG+ and IT which dominated investor attention in 2020,” notes Jefferies strategist Sean Darby.
What’s hot from Yahoo Finance:
Watch Yahoo Finance’s live programming on Verizon FIOS channel 604, Apple TV, Amazon Fire TV, Roku, Samsung TV, Pluto TV, and YouTube. Online catch Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, and reddit.