October 26, 2020 BARRON’S 29
TECH TRADER
Alphabet shares have appreciatedalmost 10%
since the House antitrust report, addingnearly
$100 billionin market capitalization.
The Big Tech Assault:
Lots of Noise, Some
Truth, 5 Great Stocks
I
nvestors seem remarkably,
almost impossibly, indifferent
to the intensifying regulatory
assault on the tech megacaps.
Consider this: On July 29,
the House Judiciary Commit-
tee conducted an extraordi-
nary virtual hearing, grilling the
CEOs ofAlphabet(ticker: GOOGL),
Facebook(FB),Amazon.com
(AMZN), andApple(AAPL). It was a
bipartisan assault, with testy ques-
tions from both sides of the aisle. In
reaction, all four stocks rallied.
On Oct. 6, the House antitrust sub-
committee 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 en-
gage in anticompetitive behavior. Once
again, the stocks posted gains.
And last week, the Justice Depart-
ment 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 busi-
nesses and asking for unspecified
remedies to force it to change its be-
havior. The stock rallied.
In fact, Alphabet shares have ap-
preciated 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 busi-
nesses 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 ob-
vious is what you would do in Apple’s
case—maybe peel off the App Store?)
Under this theory, even if the compa-
nies lose, investors could win.
Yet a third possibility is that the
market is deluding itself—that inves-
tors are in for a rude awakening as tech
regulation muffles growth rates, forces
business changes, and curtails relent-
less expansion into new business lines.
Or maybe the right answer is 3b;
even if all that happens, these bril-
liantly run companies will innovate
their way into new markets and fat
revenue growth. Note thatMicrosoft
(MSFT), the last big tech target of anti-
trust 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 disagree-
ment 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,” re-
ferring to evil capitalists of yore.
Mahaney doesn’t deny there are
legitimate reasons to ask if the mega-
techs have periodically abused their
power. But on balance he thinks they
are a positive force, benefiting work-
ers, consumers, shareholders, and the
economy. “To not provide a modest
elaboration of those benefits—to at
least be open to the idea that regula-
tory action, if not tailored well, could
undermine what have been, and con-
tinue 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 anti-
competitive 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, andeBay(EBAY), “three
companies that were dominant inter-
net franchises during their heydays
and could well have been the domi-
nant franchises of today...Amazon and
Google simply out-innovated, out-exe-
cuted, and out-competed [them].”
And third, he denies that the tech
giants have left no room for innovative
rivals. In e-commerce,Shopify
(SHOP),Etsy(ETSY),Chewy
(CHWY), andWayfair(W) are gener-
ating 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 Insta-
gram. Search is a tougher case, but
Mahaney wonders if Google remains
dominant because no one has pro-
duced 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 col-
lapse, I wrote that investors should buy
all five tech megacaps. (Adding Micro-
soft 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.B
By Eric Savitz
MANDEL NGAN/POOL/AFP/Getty Images
The most obvious conclusion is that Wall
Street thinks this is a series of chest-thumping
show trials unlikely to result in actual enforce-
ment. The Google case is likely to take years to
play out, at which time Google and its tech
pals will likely be more powerful than today.
Google CEO
Sundar Pichai
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