Investor angst over Big Tech antitrust regulation may be overblown.
Last Monday, Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), and Facebook (FB) lost more than $130 billion in aggregate market value after the federal government launched what seemed to be a coordinated campaign to examine the companies’ competitive practices. The tech-heavy Nasdaq Composite (.IXIC) fell 1.6% on the news.
According to multiple media outlets, the Federal Trade Commission was given oversight over Amazon.com and Facebook, while the Department of Justice received Apple and Google’s parent, Alphabet.
Amazon, Apple, and the Nasdaq managed to finish the week in positive territory, but Facebook and Alphabet shares declined more than 2%. Regardless, Monday’s selloff shouldn’t be ignored. Investors are worried about regulation, and the headlines won’t go away anytime soon.
But there’s no reason to be impetuous with every new story on regulation. For investors, the stock price volatility is a chance to step back and analyze each company on its own merits. Would government regulatory action materially affect the economic business models of these core four tech giants?
The companies themselves don’t want to answer questions on the topic. Amazon, Apple, and Facebook declined our requests to comment on potential antitrust issues. Google did not respond to our request. A spokesman for the DOJ said that it “does not confirm, deny, or otherwise comment on the existence or nonexistence of investigations.” And the FTC did not respond to a request for comment.
Investors deserve more clarity. Let’s start with one key point: The likelihood of breakups is slim. “The big challenge with these antitrust things is, it’s not obvious what the consumer harm is today,” says Scott Kupor, managing partner at venture-capital firm Andreessen Horowitz, which has invested in Facebook as well as Pinterest (PINS) and Slack Technologies. “If you think about the consumer utility of Facebook, Google, Amazon, and Apple, it’s not clear they are doing something that is curtailing competition. It’s not clear they are raising prices.”
Facebook’s and Google’s services are by and large free to consumers. And one could argue that Amazon’s e-commerce marketplace has played a key role in lowering retail prices for consumers.
“The idea that Facebook, Google, and Amazon have harmed consumers over the last decade is laughable,” Mark Mahaney of RBC Capital Markets, a longtime internet analyst, tells Barron’s. “I think these companies have created an enormous amount of convenience, savings, and benefits for consumers.”
Here’s our company-by-company breakdown on regulatory risk.
Apple CEO Tim Cook said this past week that the company doesn’t have a monopoly in its markets. “Our share is much more modest. We don’t have a dominant position in any market,” he told CBS News.
The numbers bear out his statement. In the U.S., for instance, the company’s iPhone had 45% of the market in 2018, according to eMarketer.
But there is another way to measure Apple’s market power, apart from hardware sales. Analysts have said any antitrust probe might focus on Apple’s typical commission of 30% for every app sold on its App Store.
But even in a worst-case scenario where the App Store is regulated, the downside looks relatively limited for Apple. The store represents about 5% of the company’s sales, according to Cowen estimates.
Earlier this month, Morgan Stanley analyst Katy Huberty estimated that if Apple were forced to lower its App Store take rate by 50%, it would negatively affect the company’s value by $13 per share, or 7%. Not a great outcome for shareholders, but certainly not the end of the world.
And before that happens, Apple would surely argue that its App Store, even with its fee structure, has actually supercharged technology innovation over the past decade. The distribution channel of smartphone app stores enabled start-ups to scale their customer bases rapidly.
“But for the iPhone as a platform, there is no question, we wouldn’t have had the last 10 years of innovation,” Kupor says. “Uber, Lyft, Airbnb…none of those exist, but for the fact that five billion people are walking around with a supercomputer in their pocket.”
Google’s parent, Alphabet
Google’s dominance is a matter of definition—the detail that often determines the outcome of an antitrust case. While Google leads the web search-engine market, the company is facing rising competition from Facebook and Amazon in digital advertising.
Internet ads remain a minority of the overall market. Digital advertising generated $88 billion in revenue in the U.S. last year, or 41% of the total advertising market, while traditional media advertising accounted for $127 billion, according to MoffettNathanson.
“For Google, certainly they are dominant in search, but they are not a monopoly in the overall advertising market. And, in fact, competition is increasing from Facebook,” notes Baird internet analyst Colin Sebastian.
IDC says that globally, Google captured some 42% share of the worldwide digital advertising market last year, while Facebook accounted for 20%. Meanwhile, according to research firm Gartner, some 55% of consumers’ web product searches now start on Amazon, not on the search engines. The FTC has examined Google’s search engine once before. A 19-month investigation ended in 2013 without legal action.
“We see the large majority of incremental regulatory risk as limited to Google’s ancillary businesses,” Evercore ISI analyst Kevin Rippey wrote last week.
Rippey said Google’s Play Store could come under scrutiny similar to that of Apple’s App Store. He estimates that the Play Store represents about 5% of the company’s market value.
Again, definition is key when it comes to Amazon. While it holds a strong position in the U.S. for online sales, it is still a small percentage of the overall retail market. EMarketer estimates that Amazon represented 37% of U.S. e-commerce sales in 2018 and 3.5% of total retail sales.
“Obviously, Amazon is not a monopoly. They are half the size of Walmart (WMT), ” Sebastian says.
Amazon has come under fire from politicians for selling its own private-label products on its e-commerce marketplace, competing with other sellers. But in April, the company said that private-label products represented just 1% of sales. The company says it doesn’t use individual seller data to launch its private-label products.
The private-label issue could open a can of worms for all of retail. Almost every major retailer relies on private-label for a double-digit percentage of its sales. And the practice of store-branded products has lowered prices for consumers compared with brand-name offerings.
Facebook has been criticized for not doing enough to fight harmful content and protect users’ private data. There is no debate there. But solving those issues is not the purview of antitrust regulators. The company is already facing regulatory action from the FTC for its privacy violations. Facebook has set aside $3 billion to cover the cost of a likely FTC fine.
But given the stock decline, investors seem more nervous about a breakup.
“These nuclear options that are being discussed among investors and in the media are unlikely,” Sebastian says.
But let’s still consider the potential. Rosenblatt Securities analyst Mark Zgutowic estimates that if Facebook is forced to spin out its Instagram unit, it could hurt the share value by 10% from the current level due to operational disruptions.
History has shown that investors don’t have much to be afraid of in terms of antitrust action. Governments tend to either lose in court—such as the DOJ’s bid to block AT&T’s (T) acquisition of Time Warner and its order to break up Microsoft (MSFT) —or to declare victory with minor settlements. The European Commission’s case against Alphabet has resulted in fines since 2017 that represent less than a third of Alphabet’s annual net income.
Alphabet’s own actions suggest that the company isn’t too concerned. On Thursday, Google announced an agreement to acquire data-analytics firm Looker for $2.6 billion in cash, subject to regulatory approvals. Getting those approvals? Not a big deal, it seems.
Instead of worrying about regulatory risk, investors should focus on fundamentals and price.
In that sense, Facebook and Alphabet may be the best bets. Both trade at a reasonable valuation of 21 times earnings estimates for the next 12 months, and they have sustainable double-digit growth years into the future—powered by a long shift toward digital advertising.
Apple and Amazon.com, by contrast, are facing slowing growth rates in their core businesses.
In March, Barron’s suggested that Apple shareholders may want to take some profits after some disappointing services announcements, saying all of the stock’s 2019 gains could fade away as investors return their focus on the company’s declining iPhone business.
Amazon’s online-stores revenue—the products it directly sells to consumers and the driver of the company’s original flywheel strategy—grew just 12% in the first quarter, down from over 20% in late 2017. With Amazon’s valuation fetching a heady 56 times Wall Street’s forward 12-month estimated earnings, it doesn’t leave much room for error.
Then there’s one company in the vaunted basket of FAANG tech stocks that wasn’t mentioned in the potential antitrust probe reports— Netflix (NFLX). Not surprisingly, the stock rose more than 5% for the week.
But with rising streaming competition coming from Walt Disney (DIS) later this year, and a pricey valuation at 84 times the next-12-month-earnings estimate, the company is also priced for perfection.
Netflix might not have an antitrust risk, but here again, investors could get burned by overemphasizing the regulatory narrative.
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