Faang traders are ignoring the antitrust rumblings

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Welcome back. After a two week break from the market, I’m getting my direction. There’s a lot to talk about. First, let’s get back to the breaking news on competitive and stock market topics (if that’s what you’ve been looking for like me). Anyway, if you have any ideas send them together: [email protected] ..

Faang investors are (almost) right when they downplay the risks of antitrust law

this story, yesterday’s FT caught my attention:

UK competition authorities are asking Facebook to sell its online imaging platform Giphy. Buy for $ 400 million after testing tentative competition concerns last year …

The competition and market regulator said Thursday it believes the Facebook-Giphy partnership will negatively impact competition between social media platforms and eliminate potential competitors in the display advertising market.

Competition regulators in smaller countries like the UK may not be as important to a trillion dollar global company like Facebook. And the $ 400 million acquisition of a GIF maker certainly isn’t that important. But the most important thing is a broader atmosphere. Global competition regulators seem to be paying attention to big tech. CMA News is the latest proof that we live in such an atmosphere.

Are investors worrying enough about this as the dominant tech companies trade between 30x (Facebook, Google) and 70x (Amazon, Netflix)? Has the risk price been set?

It helps to make a clear distinction. For those who own big tech stocks, merger policies must distinguish themselves from other broader forms of antitrust enforcement policy. The merger is simply blocked and the most recent merger is decided. It may or may not happen, but everyone knows how it works.

Enforcing more extensive competition rules for dominant companies is hell, as the experience of Microsoft’s global regulators over the past three decades shows. No attempt has been made to dissolve a truly dominant company since AT&T in 1984 (and, as a result of its exercise, a decent US telecommunications oligopoly has been reshaped). That doesn’t mean there won’t be any enforcement beyond the blocked merger, but it will be a nuisance.

Second, Big Tech is also understood as a five- or six-faang company. Very diverse in a structural and competitive position. Therefore, you need to consider each type of enforcement (“merger” and “everything else”) in a particular context.

Facebook, perhaps unique, looks vulnerable in both ways. Acquisitions are more important to Facebook’s growth than any other Faang company. Instagram (bought for $ 1 billion in 2012) and WhatsApp ($ 16 billion in 2014) are huge companies and will be key to the company’s future. In particular, the emergence of Instagram shows that new competition is emerging in social media. The idea that Facebook may not be able to take it over due to future acquisitions is a real problem. It is also clear that Instagram and WhatsApp could be forced to separate by enthusiastic supervisory authorities. Facebook isn’t just vulnerable to future transactions.

As a result, Facebook shares rose slightly in June, according to a US federal judge. Two antitrust cases closed. One was initiated by the Federal Trade Commission and the other by a state coalition for Facebook. However, the judge was not convinced that Facebook was abusing control of the social media market, but the FTC was “in a firm position to examine the acquisition of Instagram and WhatsApp”. and then you extend the deadline until next Thursday. The game is still running.

Is the market concerned enough about Facebook and antitrust laws? Well, the company trades in multiples of half of Amazon’s sales. Amazon has roughly the same long-term annual sales growth rate (around 30%). Part of this gap could be because Facebook’s future growth trajectory is less secure than Amazon from both competition and regulators. But Google’s owner, Alphabet, is a solid, competitive fortress that’s hard to cut (where the seams are), and European regulators have tried to restrict Facebook, but apparently not. It is traded similarly in multiples. Hence, it is difficult to know what the antitrust risk of the Facebook price is.

Part of the problem is that it is difficult to quantify the vulnerability of Facebook antitrust law. Hence, even if they matter, they are subject to Armstrong’s rules here.

If it is not possible to carefully quantify the risk to the future profitability of a growing stock company, that risk will be ignored by investors as long as the broad bull market persists.

Amazon is the most interesting contrast to Facebook. On Amazon, the market seems to be ignoring the roar of antitrust law, and that approach makes sense to me. The company makes acquisitions but doesn’t rely on them to grow. Whole Foods Market, the largest acquisition in history, acquired for $ 13 billion in 2017, is an experiment, not a core strategy.

If you separate Amazon’s two largest businesses, online retail and Amazon Web Services, the overall valuation of your company could also be successful in a million times more sales (two companies contribute almost equally to the company’s operating income).

In fact, some wise activists are buying a lot of Amazon stock and inciting them. Amazon’s reaction will no doubt be a hilarious display of savage arrogance that makes the entire movement valuable. Someone does this.

But, as my colleague Dave Lee pointed out to me, at least on a high level of abstraction there is a meaningful split between Amazon. Amazon’s growing warehouse and delivery activities serve as a logistics provider for its competitors in e-commerce. This is simply because Amazon’s sales infrastructure is faster, cheaper, and ready to share than anyone else.

This strange relationship with a competitor was described by former scholar Lina Khan. Paper It ended up being her job as chairman of the Biden FTC:

Amazon has turned its advantage as an online retailer into considerable bargaining power in the shipping sector and has thus secured favorable conditions from third-party providers. This enabled Amazon to extend its advantage over other retailers by creating a fulfillment service with Amazon and establishing its own physical delivery options. .. .. There are two unwanted options left to competitors in the retail sector. Either try to compete at a disadvantage with Amazon or rely on your competitors for handling shipping and logistics. .. ..

The fact that Amazon is competing with many companies that become dependent on it creates many conflicts of interest that Amazon can exploit.

I have a deep understanding of Khan’s view of economic freedom on which his criticism of the Amazon is based. The fact that there are only a few megacorporations that are responsible for the most important parts of the economy is a very bad prospect for a free country. But that is not our concern here. Our concern is whether the government’s separation of Amazon’s logistics / delivery business from its e-commerce business will pose a risk to the company’s stock price, and we don’t know if it does.

First of all, it’s a nightmare. What Amazon Can Hold – Warehouses are allowed, but trucks, planes, and the new Kentucky aren’t. Air hub ?? In a way, Amazon e-commerce is all of the logistics. And if you want to outsource Amazon’s ecommerce infrastructure, does Wal-Mart need to outsource in-store sales and share it with competitors? After all, Wal-Mart still sells twice as many products (annual product sales of around $ 500 billion worldwide, Amazon $ 230 billion).

Second, what part of Amazon’s value is in the mail order business? This bit can be called a newer, more professional, and more efficient FedEx or UPS. These two companies trade 18 times and 13 times this year’s sales, respectively. If Amazon’s delivery could be split up, even if it took some of Jeff Bezos’ ability to choke on competitors, ecommerce and AWS would look even better, so the total number may be valued higher in the short term. Amazon investors don’t seem to have too much to worry about.

Good read

I was relieved. Discover that a large middle-aged study discovered that my slow metabolism did not lead to my fate. When people adjust their weight and muscle mass, men and women between the ages of 20 and 60 burn roughly the same amount of calories. To celebrate the news, I’m going to have a quart of beer tonight. Toast.

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