Wall Street Pooh-Poohs ‘Nuclear Options’ for Facebook, Google
(Bloomberg) -- The U.S. government probably won’t go for “nuclear options” like forcing Alphabet Inc.’s Google, Facebook Inc. and Amazon.com Inc. to break up, analysts said. That may set up battered tech stocks for a rebound after antitrust fears erased more from $130 billion in market values Monday.
Any recovery was off to a tepid start on Tuesday, as Facebook shed as much as 2%, Google rose 0.8% and Amazon gained 0.9% in early trading. Other Internet names joined a broader market rally, with Apple Inc. rising as much as 1.9%. Netflix Inc., Snap Inc. and Twitter Inc. gained too.
Raymond James called Monday’s pullback a buying opportunity. “We believe valuations are attractive” following the sell-off, particularly for Google and Facebook, analyst Aaron Kessler wrote in a note. Although investigations may continue, investors will probably focus on “solid” core fundamentals at the companies, as long as there are no material fines or actions, he said.
“The biggest impact may be that future acquisitions of size will be much harder to do,” Kessler added -- though most investors were likely already assuming big deals were going to be tough.
Government sanctions on large tech companies “aren’t remotely imminent,” AGF Investments’s Greg Valliere wrote. That’s because “the industry has pumped enormous amounts of money into Washington lobbying, and — of course — is increasingly lavish with political contributions,” he said. Valliere added that “there’s no serious legislation that has a chance of passage anytime soon,” while probes at the Justice Department and the FTC “are just gearing up, and could take years to complete.”
Valliere expects some “wrist-slapping early in the next decade, perhaps the enactment of new privacy standards and surely some stiff fines for anti-competitive behavior — nothing that would dramatically affect the firms’ earnings.” AGF’s mantra, “as Donald Trump and Elizabeth Warren blast away at the industry, is to remember that the pro-business Senate is the ultimate firewall, unwilling to punish the most successful industry in our lifetimes,” he said.
Rosenblatt Securities’s Mark Zgutowicz in a note called the likelihood of a Facebook breakup “nil,” although he added that headline risk has gone up. Zgutowicz noted that in March, when a new FTC task force was “put in place to consider unwinding consummated M&A of tech giants,” he’d said a forced Instagram spin-off wouldn’t deliver “sought-after anti-competitive restitution,” and therefore he saw a break-up as “low probability.”
“Nuclear options” such as mandated breakups of Google, Facebook or Amazon, or exposing search or feed algorithms, are “fairly low,” Baird’s Colin Sebastian wrote in a June 3 note. He saw a moderate chance for antitrust actions that fall short of breakups, and expected there may be privacy and security regulation.
Baird called out one possible “refuge” for Facebook and Google: regulators have in the past emphasized “consumer harm,” while both companies offer free services. He added that growth at Facebook, Instagram and Amazon have boosted competition for Google, while regulating search might hurt businesses.
At the same time, Sebastian warned that investigations may present “distractions,” and cited the risk of government overreach. Government policy concerns have already affected “private sources of capital, and in some cases, company expansion plans and even hiring,” the firm notes, while expecting that punishing “big tech” will gain traction ahead of the 2020 Democratic primaries. Alibaba Group and Amazon may outperform other FANGs under the “specter of government intervention.”
More negatively, Compass Point’s Isaac Boltansky said that there’s “broad agreement in Washington that big tech warrants additional scrutiny.” In a note, Boltansky cautioned that “big tech faces a persistent political overhang that will almost certainly impair growth trajectories.” At the same time, he said “the ‘break up’ conversation is more political than practical at this point,” adding that “there are divergent thoughts on the scope of the investigation and the severity of the problems in question.”
The antitrust issue comes at a time when investors have already been concerned about other headwinds facing the sector. Apple shares are down about 17% from a peak in early May; last month’s losses were driven by uncertainty surrounding trade tensions between the U.S. and China.
Wedbush analyst Daniel Ives called the antitrust news “a near-term gut punch for tech investors already dealing with market jitters and the U.S./China UFC battle,” though he added that “bark is worse than the bite” with respect to the potential impact of regulation.
For Alphabet, the antitrust issues come at a time when it is “tactically challenged by slowing growth,” in the view of Evercore ISI analyst Kevin Rippey, referring to the company’s most recent quarterly report in a note published Monday.
Also on Monday, Citigroup analyst Mark May said Google and Facebook face little risk to their businesses from potential U.S. government investigations into anti-competition behavior. For Google, the worst case scenario of a new U.S. investigation would probably be similar to what occurred in Europe, where Google paid a large fine but wasn’t forced to significantly alter its business model. The case for anti-competitive behavior by Facebook is “even less clear than it is for Alphabet,” wrote May, adding that it isn’t a “meaningful risk factor.”
Beacon Policy Advisors agreed that Facebook probably faces less antitrust risk than Google, even though it’s borne the brunt of Washington’s “tech-lash” since the 2016 election. Beacon in a note saw the DOJ and FTC as likely to take more “preliminary steps” in the months ahead to better understand how Google, Facebook and Amazon operate.
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