Tech Stocks to Avoid in Year 1 of Biden's Presidency

New regulations and policies could slow the blazing growth of Tesla, among other tech darlings.
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(Veteran tech analyst Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a free trial.)

On Friday, Markman looked at likely tech stock winners of a Biden Administration; today we look at probable tech stock losers in the early days of Biden's Presidency.

Last September, it was popular for tech investors to fear a Joe Biden presidency, with the threat of more regulations and higher taxes driving markets lower.

In reality it’s difficult to put a finger on planned Biden Administration policies that will be directly detrimental to tech businesses. Even the impact of higher taxes may be offset by better growth as the economy moves beyond the pandemic.

New regulations, however, are a different kettle of fish. And if I’m right, trouble is coming to Facebook, Tesla and Palantir.

Some qualification is necessary. For more than a decade, investors have been through an unprecedented era of lax government oversight. With a wink and nod, tech leaders did what they pleased, and stock prices roared.

Exceptional managers flipped the switch on the status quo. They bet on their ingenuity, operational excellence and got products to market more quickly than ever before.

Facebook  (FB) - Get Report was built on the very idea of moving fast and breaking things. The core concept is that speed and innovation leads to better products. Failing fast is a good thing. This philosophy allowed the Menlo Park, Calif.-based company to gobble up WhatsApp and Instagram on the way to building a social media empire that now encompasses 3.1 billion monthly active users.

Biden has said he’s uncomfortable with Facebook’s online dominance. He and lawmakers from both sides of the political aisle would like to do away with Section 230, legislation that absolves companies such as Facebook from the legal repercussions of content posted by their members.

The repeal of Section 230 would be negative for Facebook shareholders. Operating the current business would become much more challenging, with litigation being unending. The company has squeaked out of other existential dangers before, but impatient investors probably won’t want to hang around to see if this cat has ten lives.

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On paper, Tesla  (TSLA) - Get Report seems like a logical winner in a Biden Administration. The new president has made green energy a cornerstone of his economic agenda and new businesses are largely greener by design. However, like Facebook, Tesla has been moving fast and breaking things, too. An epic battle is being set up now between Biden administration green advocates and safety advocates.

Managers at Tesla have pushed the entire automotive sector toward electrification. They built fun-to-drive EVs with the best charging infrastructure. Its self-driving software is still light years ahead of the competition. Skeptics may quibble but for most drivers, full autonomy begins with hands-free navigation through busy intersections. Most of the time a fully spec’d Tesla equipped with Autopilot can perform this task and more. It seems too good to be true. And the software that allows it to happen is completely unregulated.

Pete Buttigieg is the incoming Department of Transportation chief for the Biden administration. Given his background in consulting at McKinsey and Co. and that Biden has pledged to follow facts regarding important public safety decisions, it is reasonable to expect stiff regulatory headwinds for self-driving software. Tapping the brakes on one of Tesla’s major competitive advantages will be extremely consequential for shareholders, especially considering the perception that General Motors  (GM) - Get Report and Chinese competitors Volvo and Nio  (NIO) - Get Report are gaining ground on Tesla.

Tesla shares have gained a whopping 2,708% since the Sept. 2014 introduction of Autopilot. It’s fair to attribute some of those gains to the advance toward self-driving. Going fast, whether it is the share price, driving or software development is standard practice at Tesla. Out of an abundance of caution, Biden is likely to slow the ride.

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Palantir  (PLTR) - Get Report is a secretive data analytics company that was initially funded by the Central Intelligence Agency. The company rose to fame in 2017 when Alex Karp, its chief executive officer, defended the company’s involvement with controversial programs at U.S. Immigration and Customs Enforcement (ICE).

As Biden sat at the President’s Resolute desk on Wednesday, he signed an executive order to rescind the 2017 directive from President Trump that made every undocumented immigrant a priority for arrest. Trump’s executive order had become the basis for increased funding to Palantir.

Palantir had previously developed software to help support ICE investigations. Its database tool builds complex profiles by pulling data from other government agencies and even private sources. It can track biographical information, social media posts, birthmarks, biometrics, tattoos and even location. Palantir’s software is the kind of tool that makes civil libertarians weep.

Investors only see green. Since its Sept. 2010 initial public offering at $10 per share, Palantir shares have zoomed all the way to $34 before pulling back over the past three months. The stock now trades at 220x forward earnings and 44x sales, which is extremely expensive by conventional standards. Clearly, investors are anticipating massive business growth moving forward, and soon. Given the Biden administration’s proclivities regarding immigration, however, ICE contracts may dwindle.

I don’t know if Facebook, Tesla and Palantir shares will ultimately decline during the course of the Biden administration. It’s too early to tell what parts of his agenda will get through Congress. Yet it is clear that the current valuations of stocks like these leave little room for disappointment, which is inevitable when expectations for positive changes are so high.

Therefore it may be best to steer clear of these three stocks, especially in the early going.

Facebook is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells FB? Learn more now.