Investors seem remarkably, almost impossibly, indifferent to the intensifying regulatory assault on the tech megacaps.
Consider this: On July 29, the House Judiciary Committee conducted an extraordinary virtual hearing, grilling the CEOs of
(AAPL). It was a bipartisan assault, with testy questions from both sides of the aisle. In reaction, all four stocks rallied.
On Oct. 6, the House antitrust subcommittee published a scathing 449-page report on those same companies. The report, signed only by the panel’s Democratic members, attacked their conduct, declaring that both Google and Facebook are monopolies that engage in anticompetitive behavior. Once again, the stocks posted gains.
And last week, the Justice Department and 11 state attorneys general— all Republicans—filed a long-expected antitrust lawsuit against Alphabet, alleging that Google has engaged in anticompetitive activity in the conduct of its search and advertising businesses and asking for unspecified remedies to force it to change its behavior. The stock rallied.
In fact, Alphabet shares have appreciated almost 10% since the release of the House report, adding nearly $100 billion in market capitalization. Facebook, Amazon, and Apple have all posted gains over the same period.
How to interpret this? The most obvious conclusion is that Wall Street thinks this is a bunch of hooey, a series of chest-thumping show trials unlikely to result in actual enforcement. The Google case is likely to take years to play out, by which time Google and its megatech pals will likely be bigger and more powerful than today, as online advertising, retail, and content businesses grow at the expense of their offline brethren. And, by the way, we could be a few weeks away from a changing of the guard at the DOJ.
An alternative explanation is that investors actually would welcome a forced breakup of the tech giants—that it would create value by forcing spinoffs of, say, YouTube, Instagram, and Amazon Web Services. (Less obvious is what you would do in Apple’s case—maybe peel off the App Store?) Under this theory, even if the companies lose, investors could win.
Yet a third possibility is that the market is deluding itself—that investors are in for a rude awakening as tech regulation muffles growth rates, forces business changes, and curtails relentless expansion into new business lines.
Or maybe the right answer is 3b; even if all that happens, these brilliantly run companies will innovate their way into new markets and fat revenue growth. Note that
(MSFT), the last big tech target of antitrust regulators, has surged this year to a record valuation.
RBC Capital internet analyst Mark Mahaney this past week wrote a thoughtful response to the House committee report, which he found a little perplexing. Mahaney has been covering internet stocks for more than 20 years, and knows the companies as well as anyone on the Street.
At the heart of Mahaney’s problem with the report is a stark disagreement on whether these companies are a force for good or fundamentally evil. The legislators vote “evil.” They wrote: “Companies that once were scrappy, underdog start-ups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons,” referring to evil capitalists of yore.
Mahaney doesn’t deny there are legitimate reasons to ask if the megatechs have periodically abused their power. But on balance he thinks they are a positive force, benefiting workers, consumers, shareholders, and the economy. “To not provide a modest elaboration of those benefits—to at least be open to the idea that regulatory action, if not tailored well, could undermine what have been, and continue to be, enormous societal benefits in the United States—seems to us to be risky,” he writes.
Two, he contends that the antitech crowd fails to concede that the primary driver for these companies has been innovation and execution, not cheating and bullying rivals and partners. “The report’s consistent assertion that anticompetitive practices have been the primary source of growth and market power…is flat-out wrong,” he writes.
Mahaney makes the obvious point that the hearing wasn’t about, say, Yahoo, AOL, and
(EBAY), “three companies that were dominant internet franchises during their heydays and could well have been the dominant franchises of today…Amazon and Google simply out-innovated, out-executed, and out-competed [them].”
And third, he denies that the tech giants have left no room for innovative rivals. In e-commerce,
(W) are generating huge growth, despite ongoing growth at Amazon. In social media, TikTok has surged to more than 100 million users in the U.S. alone, luring young users from Facebook’s Instagram. Search is a tougher case, but Mahaney wonders if Google remains dominant because no one has produced a better search engine. Microsoft is bigger than Google on almost every metric, and yet Bing is a distant No. 2.
In March, with the market in collapse, I wrote that investors should buy all five tech megacaps. (Adding Microsoft to the mix.) Hope you did. Despite the regulatory scrutiny, I still believe the five are going to exit the pandemic stronger than ever, with years of robust growth to come, no matter the noise coming from Congress, the White House and the courthouse.
Write to Eric Savitz at email@example.com