Big Tech has found itself in the crosshairs of big government in recent months. As we wrote in June, the political tide has been moving against the tech giants, resulting in very real risks to the future of these companies.
Apple Inc. (AAPL, Financial), Amazon.com Inc. (AMZN, Financial), Facebook Inc. (FB, Financial) and Alphabet Inc. (GOOGL, Financial) have faced the brunt of the political pressure. Their massive valuations could also come under pressure if the threat of material government intervention becomes credible.
From fringe to mainstream
The political threat to Big Tech is very real. Indeed, some leading politicians have even started calling for them to be broken up. Senator Elizabeth Warren, a leading candidate for the Democratic presidential nomination, was the first to call for a breakup of the tech giants, but she was soon followed by other heavy-hitters like Senator Bernie Sanders.
Warren has called out Amazon, Facebook and Alphabet in particular, but promises even more sweeping action if elected president:
“America has a long tradition of breaking up companies that get too powerful. We need to use that same political courage and real muscle again — this time to break up big tech.”
The market clearly does not take these threats seriously at present, but if one of the tech-busting candidates secures the Democratic nomination, that tune might quickly change.
Bipartisan threat
Investors have taken the threats of a breakup of big tech companies with a grain of salt for the most part. This has been due to their apparent belief belief that the Republican Party, traditionally a strong advocate for business and opponent of government economic intervention, would kill any such action. However, as Warren has pointed out, antitrust action has a long history of bipartisan support:
“Just over a century ago, it was both Republicans and Democrats who fought back and broke up big monopolies.”
While some might scoff at the notion that today’s GOP would take part in the dismantling of any massive corporations, tech or otherwise, it should not be dismissed out of hand. Indeed, in early June it was reported that the Department of Justice had opened antitrust investigations into Amazon, Apple and Google (Alphabet’s search engine division). While Facebook apparently escaped the DOJ investigation, it has run afoul of the Federal Trade Commission, resulting in a $5 billion settlement, as well as being included in the House Judiciary Committee’s investigation of tech industry competition.
Big Tech goes to Washington
On July 16, top executives from four major tech companies will face fresh scrutiny at a congressional hearing. The hearing will undoubtedly be used to increase pressure on the DOJ to accelerate its antitrust investigations. According to Herbert Hovekamp, a leading expert on antitrust law and competition policy, the executives will face a serious grilling from Democrats:
“There is increasing agitation among Democrats...I expect focus on exclusionary contracts, such as the one Apple has with its App Store (the subject of a class-action lawsuit), and acquisitions of smaller tech firms. The large tech companies are buying lots of them to prevent startups in related fields from emerging as the next Facebook or Google.”
With the Democrats in control of the House, they will have the ability to shape the course of questioning, which could prove very uncomfortable for many tech executives. The event is not likely to generate as much buzz as when Facebook CEO Mark Zuckerberg faced a congressional grilling, but it will be essential viewing for investors in these companies.
Verdict
It is certainly a strange time for big tech companies. Political risk is at an all-time high, even as their valuations touch record levels. Even a whiff of serious federal action could send tech stocks tumbling. On June 3, after the DOJ and House investigations were revealed, Amazon, Alphabet and Facebook fell 4.6%, 6.1% and 7.5%. That was merely a taste of what could happen if the federal government gets serious about taking antitrust enforcement action, let alone moving to actually break up the tech giants.
The tech giants are in a more precarious situation than at any other point in their history. Investors should be very wary of where the political winds are blowing. Things could get ugly.
Disclosure: No positions.
Read more here:
- Ray Dalio Says It's Time to Buy Gold
- Tesla: The Dark Side of a Mission-Based Company Culture
- Tesla: Treating Employees as Disposable Tools Is Not Sustainable
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
