A year ago you were a considered a maniac if you didn’t have your portfolio loaded with FAANGs and other tech stocks. What a difference a year makes! Tech stocks are now largely out of favor after a rough year that has underperformed the S&P. There are a lot of fears of regulatory scrutiny and slowing financial performance. The tide has turned so much against the stocks that it is fair to call them a contrarian bet.
FINSUM: It sounds quite ridiculous to call some of the world’s most popular stocks over the last few years “contrarian”, but it seems true at this point. It appears it might be a good time to buy, though regulatory fears may prove legitimate.
A year ago, the FAANGs were flying high. In the previous twelve months they had risen 52% against the market’s 13% growth. The group of tech stocks has since suffered, underperforming the S&P 500 in the last year. In fact, a group of very conservative stocks have been leading the way. Call them the “WPPCK” (not as catchy, we know), which is comprised of Walmart, Procter & Gamble, Pepsico, Costco, and Coca-Cola. This group has risen 27.1% in the last year versus the S&P 500’s 7.2% gain and the FAANGs’ 5.7%.
FINSUM: It is hard to imagine a less flashy group of stocks than these, but they have been strong and steady, which seems like a good formula for this unpredictable market.
Consider it a warning shot across the bow of Silicon Valley, the opening salvo in a potentially brutal antitrust war. The head of the Department of Justice said in a public speech yesterday that low prices and free services would not shield “monopolists” from scrutiny. “There are only one or two significant players in important digital spaces, including internet search, social networks, mobile and desktop operating systems, and electronic book sales … This is true in certain input markets as well. For example, just two firms take in the lion’s share of online ad spending”, said the head of the DOJ, Makan Delrahim. He continued “Like today’s tech giants, Standard Oil was pioneering and generated a number of important patents. Scholars have noted, however, that Standard Oil’s innovation slowed as it became an entrenched monopolist”. Delrahim also listed specific behaviors which would spark investigation, including bundling products together.
FINSUM: The government is poised to launch a large and multi-fronted war on big tech. How long this will take, or how it will play out in markets is anyone’s guess, but it is hard to find any positives as far as big tech company share prices are concerned.
Markets sold off in a big way when new of the government’s antitrust push against the FANGS came out. The stocks lost $130 bn of value. However, the reaction may be overblown, with each stock needing to be assessed on its own merits, as the antitrust picture would look different for each of them. A managing partner at Andreesen Horowitz, one of Silicon Valley’s top venture capital firms, makes an interesting point, saying “The big challenge with these antitrust things is, it’s not obvious what the consumer harm is today”.
FINSUM: We think that point is very salient, as given the fact that it is hard to assert how consumers are being harmed, we expect the ultimate output of these investigations may be relatively light touch (such as a GDPR-like regulation).
All of the last year’s fear of anti-trust regulation seem to be coming true. Tech shares dropped yesterday on news that top US regulators had divvied up jurisdiction of tech giants for a forthcoming probe. The Department of Justice and the Federal Trade Commission, the agencies in charge of anti-trust, have decided who will manage what as they prepare to launch an anti-trust probe into Facebook, Amazon, Google, and Apple. It is still unclear exactly what will be investigated, as well as the scope of the probe. After the market closed, the US House of Representatives also announced its own investigation. The tumble in shares sent Google into a bear market.
FINSUM: This has been looming for some time, but now looks like a reality. This could be the start of some very serious volatility and changes for the FANGs.