Pressure on such firms has been ratcheted up following Sen. Elizabeth Warren’s recent calls on the presidential campaign trail to break up Amazon, Facebook, Apple and Google. Other candidates are likely to go after the companies as well, leading to new regulations that these experts say could send costs climbing and drive down their profit margins and stock multiples.
“When government regulation starts to look at a sector, it just looks at the biggest ones,” Michael Antonelli, a market strategist at the $130 billion Robert W. Baird Private Wealth Management, told Business Insider by phone. “These stocks are going to have very, very severe headwinds.”
The situation in mega-cap tech reminds experts like Antonelli of the antitrust issues that Microsoft faced from 1998 to 2001. The Department of Justice accused the software giant of holding a monopoly and engaging in anticompetitive practices.
A judge initially ruled that Microsoft be broken into two entities, and only after a long appeal process did the company finally reach a more palatable settlement. But Microsoft’s stock struggled for years, failing to surpass its early-2000 peak until 2016.
There are also flashbacks to the scrutiny faced by big banks after the 2007-2008 financial crisis. It was their dangerous lending and investing behavior that absorbed much of the blame after the economic meltdown. Some big-name bank stocks still haven’t fully recovered their losses from that period. Even after the crisis ended, tighter regulations restricted their growth for years.
This pessimism could carry grave implications for the stock market. After all, the four giant companies targeted by Warren are among the market’s biggest winners over the decadelong bull market.
But while Warren is singling them out because of their size and reach, the Stifel Nicolaus money manager Chad Morganlander says other tech companies are also in trouble.
Morganlander is specifically referring to other social-media stocks like Snap and Twitter, which he says might struggle as both the government and the general public get more critical of how the companies gather and handle their personal data.
“The consumer backlash as well as regulatory backlash could create intermediate to long-term headwinds for many of the social-media platforms,” Morganlander, who oversees a $2.5 billion portfolio, told Business Insider.
He said he’s avoiding those stocks because investors are projecting years of strong profit margins that may not come to fruition. If new regulations force them to get more active in moderating potentially harmful content, those expectations might become very hard to reach, Morganlander said.
Jessica Melugin, an associate director of the Center for Technology and Innovation at the libertarian Competitive Enterprise Institute, said intervention by the government would frighten potential investors and reduce earnings. Since profit growth has been the foremost driver of stock gains over the past 10 years, that could spell bad news for the overall market.
“Innovating for consumers drives profits in the marketplace,” she wrote by email. “When you displace the profit motive with other sociopolitical goals, like helping smaller competitors, innovations for consumers will slow.”
Stepping outside the social-media realm, Morganlander also argues that Google and other companies that traffic in user data will also have to make some big adjustments.
“The good old times of gathering personal information and selling it to third parties, I think, is in the latter innings,” he said. “Eventually either business is going to make a responsible decision or regulators will make that decision for them.”
Amid the worrying comparisons, Morganlander and Antonelli say investors should consider rotating out of the industry into less scrutinized areas. In fact, they think that might actually be a positive thing for the broader market.
“They face stronger headwinds than restaurants or software or any of these other kinds of places investors can go,” Antonelli said.