It’s the worst news that the major technology names could have heard. Earlier this week, reports surfaced that the Justice Department is angling to investigate several high-profile tech firms for possible anti-competitive business practices. This disclosure presents substantial headwinds to so-called FANG stocks.
Bears immediately focused on consumer-tech giant Apple (NASDAQ:AAPL), which had suffered severely from the escalating U.S.-China trade war. In May, AAPL shares dropped 16.5%. Neither government regulations — Apple already caught the DOJ’s interest — nor heightened tensions with Mexico are helping matters.
But the challenge of government oversight extends far beyond hardware providers. After all, the primary focus underlining the FANG stocks is the service platform. And that’s where things get tricky. In order to provide conveniences, tech firms must use at least some end-user data. However, most Americans are leery about how corporations collect their personal information and internet behaviors.
Thus, it’s no surprise that FANG stocks tanked on Monday. Many continue to look technically vulnerable. Federal oversight and regulations would theoretically cut into digital-advertising revenues and related synergies.
At the same time, investors should take this seemingly bearish news with a grain of salt. Like any government action, you can expect the DOJ to take its time, with a few blunders added in. Moreover, past Congressional hearings indicate that the political class calling for tech changes don’t know anything about tech.
Regulations can also ironically help FANG stocks longer term, as Forbes’ contributor Jon Markman argues. As well-heeled blue chips, the corporate alpha dogs can afford to comply with regulations. The smaller fish cannot.
Nevertheless, investors should stay vigilant on the FANGs until we receive more clarity.
Facebook (NASDAQ:FB) puts the “F” in FANG stocks. But with the political uproar, several investors are thinking of another word that begins with “F.” It’s not hard to see why. On Monday, FB stock tanked 7.5% against the prior session.
Still, I wouldn’t start panicking on the social-media giant yet. First, whether you like it or not, FB stock levers a moat. Actually, it’s one of the biggest moats ever. Even the major players like Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) can’t come close to Facebook’s astounding reach and scale.
Second, Facebook CEO Mark Zuckerberg has made it his personal mission to restore his company’s brand and reputation. After suffering multiple scandals, management essentially called for a reset. Now, he’s openly inviting Congress to partner in the company’s new vision. Overall, that’s a positive for FB stock as the move helps deflect criticism.
On the surface, federal scrutiny over FANG stocks would disproportionately impact e-commerce powerhouse Amazon (NASDAQ:AMZN). Not only has the company redefined the retail landscape, Amazon is disrupting several industries outside its core business. Some might say that the organization is the embodiment of anti-competitive behavior. That sentiment is unhelpful for AMZN stock, especially at this juncture.
However, Amazon is a tricky situation because the cat is out of the bag. I’m not sure what our federal regulators would accomplish here outside of greenlighting or rejecting acquisitions. No matter what Americans say about digital privacy, they love the conveniences of the internet: just look at e-commerce sales as a percentage of total retail. This trend invariably boosts AMZN stock.
But one potential headwind is international regulations. For instance, Amazon has run afoul of India’s commerce laws which is incredibly problematic. You see, while AMZN stock is a genuine powerhouse, its international growth metrics leave much to be desired. Still, you got to like the company figuring it out eventually based on their track record.
Among FANG stocks, Netflix (NASDAQ:NFLX) is the quietest name. That’s not surprising as the company isn’t involved in high-level user-data aggregation. As far as I’m aware, no one is blaming Netflix for helping to elect Donald Trump.
But that doesn’t mean regulation concerns don’t impact NFLX stock. For one thing, management is politically sensitive, which possibly means they’ll self-regulate for their brand’s sake. A prime example is Georgia’s “heartbeat” abortion bill. Netflix may “rethink” their business relationship with the state if the law goes into effect.
Like Amazon, the bigger concern for NFLX stock is abroad. Inarguably, Netflix is one of the most successful disruptive firms. When people talk about the cord-cutting phenomenon, they usually have Netflix in mind. Having conquered its home market, the more pressing issue is international regulations.
Reaching out to the worldwide market necessarily involves different cultures, customs and expectations. Netflix has previously submitted to regulations that control content and subject matter, leading to censorship accusations.
Admittedly, it’s a tough balancing act. Ultimately, though, I expect the company to do what’s right for business. This should placate stakeholders of NFLX stock.
Alphabet (GOOG, GOOGL)
The company formerly known as Google puts the G in FANG stocks. But right now, shareholders have another word in mind that also starts with “G.” If you don’t know what it is, take a look at the price chart for Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
In just the Monday session alone, GOOG stock dropped nearly 3%. Since Friday’s close, the equity is down slightly more than 6%. There. You probably just said the word.
As you know, GOOG stock has been the subject of regulations, both here and abroad. It’s also incurred billions in penalties. Some of this is political as liberals and progressives worry about the proliferation of hateful ideologies and Alphabet’s responsibilities to address them. Other concerns stem from possible anti-competitive behaviors.
But like the other FANG stocks, Alphabet levers a massive moat: essentially, it owns the internet. And when you have such an unprecedented platform, companies want to partner with you. Overbearing regulations, then, doesn’t just hurt GOOG stock; it also negatively impacts commerce for smaller organizations.
I don’t believe domestic or international regulators are stupid. Thus, I expect a measured approach, which benefits Alphabet and all other FANG stocks.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.