Anti-trust scrutiny of U.S. big tech companies emerged publicly and with vigor this week, but investors and analysts alike are not concerned. ‘
House Democrats this week revealed a report of hundreds of pages long, providing evidence in support of the argument that Apple (AAPL) , Facebook (FB) , Google (GOOGL) and Amazon (AMZN) should be broken up. The report, one tech analyst said, featured the phrase “monopoly’ over 100 times.
First off, some analysts have argued that the sum of the parts of big tech companies is more valuable than the value the public market assigns the whole companies. Some of that may have to do with visibility into the profit streams of smaller businesses within these giants, like Amazon’s advertising business, Google’s YouTube and so on.
Secondly, new laws restricting practices that may be anti-competitive could certainly put pressure on the business models of these companies. GDPR (General Data Protection Regulation) in the European Union has already pressured Facebook and Google. The regulation is heavy on restricting internet companies’ ability to target consumer and users’ data, which is the most important element for effective advertising.
But Wednesday, Apple, Amazon, Facebook, and Google all rose. Earnings estimates for the next few years still call for faster growth for the companies than is expected in other sectors of the economy and investors are comfortable paying current multiples. These companies, which saw their share prices correct in September, have existing legacy businesses and platforms that enable the potential for new profit streams and investors believe upside to current estimates is within the realm of possibility.
Apple, for example, is unlikely to lose its massive and sticky installed base and its frictionless operating system, which allows it to step into multiple services like payments and entertainment streaming. Apple can also use its various offerings to bundle services, take market share in certain areas and cause users to centralize their habits on Apple’s platform.
Amazon has single-handedly expanded its e-commerce opportunity by showing it can operate a same-day and one-day delivery service better than most e-commerce players -- and it can scale quickly. And many on Wall Street note that Amazon’s valuation, while higher than big tech peers at near 100 times forward earnings, is closer in with its earnings growth estimates of roughly 35% over the next few years.
But the anti-competitive issues, especially seen in Apple, Google and Amazon’s ability to use their app store and search engines to prioritize their own products, are not bothering analysts.
The House Judiciary antitrust report which cited ‘monopoly power’ in its just released findings “will highlight two fundamental issues in the Beltway vs. Big Tech battle,” wrote Wedbush Securities analyst Dan Ives in a note. “First, the lack of consensus and divergence among both sides of the aisle on the antitrust issues remains a major issue to move things forward in this 16-month investigation into the powerful grips of Apple, Amazon, Facebook, and Google. Second, despite the report/content and framework for recommendations around Big Tech players (e.g. M&A, business practices) without core law changes we believe this antitrust momentum hits a brick wall.”
As for Apple, Ives is watching the dispute over the 30% app store fee charged to developers, although his points above make that concern a minor one to investors. Plus, while app store revenue isn’t exactly nothing compared to Apple’s overall revenue, the company generates hundreds of billions of its expected $300 billion revenue stream annually from other businesses.
A blue wave election “would change the game” in Ives’ eyes. This would tilt the entire government -- the White House and Congress -- towards a more anti-big tech posture. Also, even if Democrats control Congress. It isn’t likely to be by a wide margin, leaving just a few centrist Democrats to potentially quell the magnitude of regulation.
Here are the headwinds to real policy from Congress impacting these businesses: Democrats would need to take charge, real laws need to be passed (or break-ups would need to be seen as detrimental to value not enhancing) and the pandemic and stimulus issues may need to go away in order for Congress to prioritize the big tech issue. For now, the market is looking right past antitrust policy.
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