Reuters / Rick Wilking
- Threats to big technology may seem like they’re rising. But, over the long run, strategists are optimistic about Amazon, Facebook, and Google as well as the broader tech and communications sectors.
- Senator and presidential candidate Elizabeth Warren proposed breaking up Amazon, Google and Facebook, and said Apple should have to split off its App Store.
- Few expect that to take place. But even if much more tech regulation is on the way, experts see big positives for those companies and for the sector in general.
As Senator Elizabeth Warren proposes busting up four of the world’s largest tech companies, Wall Street strategists aren’t quaking in fear.
Warren wants to break up Amazon, Google, and Facebook, and also says Apple should be forced to split off the App Store. While investors don’t want any of that to happen, they’re also not that worried about what Warren’s call means for tech.
"[Breakups] would not be, over the longer term, a terrible thing for the tech sector," Kristina Hooper, the chief global market strategist for $946 billion Invesco, told Business Insider by phone. "Regulations are not what capitalists embrace, and with good reason, but it doesn’t spell the end of the world for any sector."
She added that the tech sector would eventually overcome those breakups much like the steel and telecom industries survived the splitting of US Steel and AT&T, respectively.
Even if stock prices in the mega-cap tech space take an immediate hit, the longer-term impact is likely to be muted, according to Sameer Samana, the global equity and technical strategist for the Wells Fargo Investment Institute. That’s because traders still bullish on tech fundamentals can use selling as an excuse to boost exposure at a discount.
"If regulation was to create buying opportunities, that would probably only make us more favorable on the sector," Samana said.
Carl Szabo, vice president of the e-commerce group NetChoice, said he’s worried about rising hostility toward business and an increase in all sorts of regulation. But he’s still optimistic about the companies’ prospects in the longer term.
"These businesses are generating incredible revenues and incredible profits," he said. "Even if regulation chips into some of that, they’re still going to be significant engines of economic success."
It’s worth emphasizing that few on Wall Street think that Warren’s proposals will be enacted as they face political and legal hurdles in the event she’s elected. But even if a tech breakup does occur, or if regulatory oversight is expanded, there’s still plenty to be optimistic about.
Here are the five main reasons gleaned by Business Insider in conversations with a handful of Wall Street experts:
1) Everything is going online
The changes in modern life that have helped these four companies soar in value in recent decades, like tremendous growth in online shopping and entertainment, are so powerful that new regulations won’t diminish them. That leaves the strategists very optimistic about tech’s future.
"Tech is either at the forefront of, or it forms a backbone of, all those different big picture trends," Samana said.
2) More efficient stocks win
Hooper says huge companies that spread into numerous businesses generally trade at a discount compared to more focused ones. That’s because investors feel the larger companies are less nimble and efficient than pure plays — and it means investors might jump at the chance to invest in specific parts of Amazon, Google, or Facebook if they were split up.
"Most companies that are conglomerates trade at a conglomerate discount," she says.
3) Rivals get crushed
Warren’s proposals are aimed at a few huge companies, but it’s possible they will create more trouble for newer and smaller competitors by adding to their costs and slowing their growth.
"The larger tech companies will figure out ways to comply, but the real threat is for the smaller businesses and the startups," says Szabo.
Szabo said that the costs of some of Warren’s regulations will be "incredible," but the tech giants have more than enough cash to handle them. But smaller companies that don’t make as much money will have a very hard time doing the same.
4) The benefits of regulation
Samana and Hooper both argue that new regulations might solve real problems in the technology industry by improving data privacy and making it easier for users to trust these companies after a slew of high-profile scandals.
While Hooper says most critics are focused on the idea that new rules could threaten growth or profits, she said continuing controversies over privacy and fake news might be just as damaging for the companies and their stocks.
"Rising mistrust from consumers would also be a possible headwind," she said.
Samana said consumers might feel better about their relationship with big tech if they had more chances to decide how they want their data to be used, and the companies could gain a new revenue stream if they give users an opportunity to pay them not to collect or sell some personal information.
"It maybe ends up being a more fulfilling relationship for both sides," he said.
5) Tech’s other winners
Samana says that if new regulations are implemented, smaller tech companies might briefly rally on the expectation they will benefit. Over the longer term, he said new rules will create business opportunities for some companies.
If the tech giants have to follow new data protection or privacy rules, Samana said, they may have to spend a lot of money on new security software and upgrades.
"We are at a watershed moment for tech and data privacy," he said. "The technology almost hasn’t kept pace with how consumers’ preferences have shifted."
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