Facing Regulations, Amazon and Facebook Make Nice with the New Administration
Amazon.com (AMZN) and Facebook (FB) are two highly successful technology companies that have experienced incredible growth over the past few years. Their market caps and rising share prices have put the companies in respective dominant positions in e-commerce and social media. It is more than a challenge to compete with these two technology giants. Smaller companies have either been swallowed up by the two or crushed by AMZN and FB’s ability to use economies of scale to gain price and competitive advantages.
Another factor that creates dominance has been their access to data. AMZN and FB have complied databases and use their proprietary technology to achieve information flow that predicts and can influence consumer behavior. The growing financial and technological power puts a bullseye on the companies for government officials and regulators in the US and Europe.
The new US administration has advocated for an increased regulatory environment for all companies, and technology is no exception. Over the past weeks, both AMZN and FB have taken steps to ingratiate themselves to governments to improve their reputations. The strategic moves are likely coming as they prepare for a bumpy road in 2021 and beyond. The leading threat to earnings and share growth for AMZN, FB, and many other technology leaders is a function of government interference with their business models.
Technology stocks face headwinds in 2021
The best performing sector during one period often turns out to be the worst in the next. In 2020, the DJIA moved 7.25% higher. The S&P 500 posted a 16.26% gain. Meanwhile, the technology-heavy NASDAQ exploded 43.64% higher last year. The first reason for caution in the tech sector is the outperformance compared to other companies that trade on the stock exchanges.
Moreover, the share price growth pushed market caps to prohibitive levels, and earnings created massive cash hordes. Sustaining earnings growth could be a challenge for many of the leading companies. Finally, and perhaps most significantly, the rising power of the technology leaders has created a target for governments and the general public. Dominance over any competition and an almost monopoly on valuable data collection present antitrust and privacy issues.
In 2021, the tech sector could face mounting challenges when it comes to earnings and share price growth.
2020 gains will be hard to replicate this year
Jeff Bezos’ Amazon.com (AMZN) had an incredible 2020.
Mark Zuckerberg’s FB rose from $205.25 to $273.16 or 33.1% over the same period. AMZN outperformed the NASDAQ, while FB underperformed the technology index last year. However, both stocks did far better than the DJIA and S&P 500 indices on a percentage basis. At the end of the first month of 2021, both stocks pulled back from the 2020 closing levels.
One of the primary challenges for both companies, and other leaders in the sector, in 2021, will likely come from an increase in corporate taxes. However, all US companies are in the same boat when it comes to the IRS. Meanwhile, technology companies face another far more substantial set of roadblocks from increasing regulations.
Reining in anticompetitive behavior that is a natural progression from economic success and limiting data collection that interferes with privacy issues could stand in front of future growth. Over the past weeks, both companies have been demonstrating that they are good corporate citizens. However, the moves could be more about preserving economic power.
Amazon offers help on COVID-19 vaccines
In the immediate aftermath of the transition from the Trump to the Biden administration, AMZN reached out to President Biden the company is “prepared to leverage our operations, information technology, and communications capabilities and expertise to assist your administration’s vaccination efforts.” Aside from the political questions of waiting until the new administration took over on January 20, AMZN’s letter stressed the company is the second-leading employer in the US, with over 800,000 workers.
Dave Clark, the CEO of Amazon Worldwide Consumer, noted that most employees are essential workers who cannot work from home that should receive the COVID-19 vaccine “at the earliest appropriate time.” Offering to assist the government could also be an attempt to gain brownie points as the company is likely to face political pressures over the coming months.
Facebook uses an independent board to vet contributions
Facebook’s social media business has been in the crosshairs of many politicians in Washington DC and Europe over the past years. FB, along with Twitter and many other platforms, closed former President Trump’s account before he left office. The companies now find themselves in the middle of the debate over free speech.
Most recently, CEO Mark Zuckerberg turned the issue over the former President’s ban to its independent oversight board, informally called Facebook’s “supreme court.” Aside from whether or not the ban was appropriate, the fact that the ban has created a free speech debate is a testament to FB’s social media presence and power.
Bipartisan agreement could weigh on the shares
Teddy Roosevelt was the 26th President of the United States from 1901 through 1909. He was a progressive reformer who earned the reputation as a “trust buster” through a series of regulatory reforms and antitrust prosecutions. TR walked a fine line as he did not disagree with trusts and capitalism in principle but led the charge against monopolistic practices.
The success of companies like AMZN, FB, and other technology leaders have put them in positions where they became natural monopolies because of enormous cash hordes and access and control of proprietary data that raise privacy issues. If one shops on AMZN or expresses a desire for a product or service on FB, they find themselves bombarded with advertisements of competing products and services.
The system and activities only increase earnings for the two companies. Leading technology companies, including Alphabet (GOOG), Apple (APPL), and others, have experienced the same growth level leading to natural monopolies over the past years.
We are likely to see a new slew of regulations in the US and Europe to curb the growing monopolies. Higher US corporate taxes across the board creates a level playing field for all companies. However, increasing oversight and regulations are likely to impede rather than enhance earnings for companies like AMZN and FB over the coming months and years.
Both companies are looking to earn as many brownie points as possible with the US and European governments. However, it is not likely enough to stop the bipartisan agreement that technology companies cannot become more powerful than governments. Even though the technology sector will continue to bend over backward to make nice with the administration, I expect regulations will put a leash on their power that causes their future earnings to suffer.