Remember way back when Google (GOOG) first burst on the scene? It provided a fabulous service that let you find anything on the internet for free. And its motto was, “Don’t Be Evil.”
Those were the days.
Now Google is under pressure because it’s grown uber-large and powerful. And Facebook (FB) and Amazon (AMZN) are in the same boat.
Yes, all three companies provide great services that we have come to rely on, but it’s become increasingly clear that in the process of carrying out their missions—making money while serving consumers—they have done things that are somewhat evil.
They have been stifling competition, by acquiring competitors and operating platforms with an unequal playing field.
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And they may have been using our personal data inappropriately. At best, this was simply to make more money. At worst, it might have been losing our data to hostile forces like the Russians or Chinese.
So now there are growing calls to regulate these giants, or to split them up into smaller components, just as U.S. monopolies have been split before.
For people who are generally critical of the capitalist system, this is a no-brainer. They hate seeing companies get large and powerful, regardless of the service they are providing to users. They trust the government more than they trust big business.
But for capitalists like myself, who value the vibrancy of market forces, the wisdom of regulating and/or breaking them up is questionable.
Three Falls from Grace
Consider three examples from recent decades.
International Business Machines (IBM) was sued by the Department of Justice in 1969, accused of violating antitrust laws. The case dragged on for an amazing 13 years before the government finally gave up, at which time IBM’s share of the mainframe market had fallen from 70% to 62%—and the computing landscape had changed immeasurably. Market forces did what the lawyers could not.
AT&T (T) was broken up in 1984 after an eight-year lawsuit by the Department of Justice. The breakup created seven regional Baby Bells, while AT&T held onto the long distance business. But less than 10 years later, as cell phone use was exploding, the breakup was barely relevant. Market forces and technology built a new future.
Microsoft (MSFT) was first investigated by the Department of Justice for antitrust issues beginning in 1993. When the trial began in 1998, the charge was bundling copies of Internet Explorer with the Windows operating system—and in 2000, Microsoft was convicted of violating antitrust laws and ordered to be broken into two separate units, one to produce the operating system, and one to produce other software components. After appeal, however, which lasted into 2004, the DOJ settled for some sanctions, which didn’t seem to do much damage to the company. But Microsoft is no longer a feared giant. The market has moved on and operating systems are barely relevant today; everything is in the cloud.
So, my bias, as a believer in the market forces of creative destruction, is to let today’s giants be, and not spend government resources to try to tear them down—and especially not to create another new regulatory agency. Amazon will eventually go the way of Sears (SHLD). Google will eventually go the way of Netscape. And Facebook will eventually go the way of Compuserve.
But it will take a long time, whether or not the Department of Justice comes knocking.
What to Do with Amazon, Facebook and Google Stock
And what if you own these stocks?
The first thing to note is that all three companies are still growing at good rates.
Factor One is Fundamentals.
Amazon grew revenues 20% in the latest quarter and is projected to grow earnings 46% in 2020.
Alphabet grew revenues 22% in the latest quarter and is projected to grow earnings 17% in 2020.
Facebook grew revenues 30% in the latest quarter and is projected to grow earnings 17% in 2020.
Those are fine growth rates and thus the long-term prospects for all three companies are fine.
However, there are two more factors that I like to consider when evaluating stocks’ prospects.
Factor Two is the Chart.
As charts go, all three of these giants saw their stocks hit record highs last year, all three bottomed late last year, and all three have rallied since.
Facebook’s chart is the worst, still 24% off its high.
Amazon’s chart is better, just 11% off its high.
And Alphabet’s is the best, just 4% of its high.
But none of these stocks are hitting new highs today. They are not market leaders.
Factor Three is Sentiment.
More precisely, factor three is the potential for public sentiment to change. And this is often overlooked by investors!
The ideal growth stock is a small, little-known company that is gradually discovered by new investors, who buy the stock and thus push it even higher. These new investors can be small, or they can be large institutions, but their combined buying power is a powerful factor in the stock’s advance.
Today, for example, Twilio (TWLO), Exact Sciences (EXAS) and Cronos (CRON) are all benefitting from this factor as more and more investors discover their products and services and buy their stocks. The buyers outweigh the sellers.
With AMZN, FB and GOOGL, however, that factor is not only non-existent; it is at risk of being reversed. Everyone knows these giant companies; no one is discovering them for the first time. And all institutional investors have the appropriate share of these stocks in their portfolios. Thus, there is greater potential for sentiment regarding these companies to get worse, rather than better. There is far more potential selling power than buying power.
And that’s what worries me about these three tech stocks. Already, the fact that they haven’t hit new highs yet this year is an early sign that investors are starting to feel just a little less in love for these stocks, and the big risk is that sentiment could get a lot worse, especially if the forces working to regulate these companies—or break them up—continue to gain traction.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More