Weigh the antitrust case against Google, Apple, Amazon and Facebook

According to several media, the Federal Trade Commission has been tasked with monitoring Amazon.com and Facebook, while the Justice Department has received Alphabet, the parent company of Google and Apple.

Amazon, Apple and Nasdaq managed to end the week in positive territory, but Facebook and Alphabet shares fell by more than 2%. Anyway, Monday's sale should not be ignored. Investors worry about the regulations and the headlines will not go away anytime soon.

But there is no reason to be rash with every new story on regulation. For investors, stock price volatility is an opportunity to step back and analyze each company individually. Would the regulatory measures taken by governments have a significant impact on the economic models of these four technology giants?

The companies themselves do not want to answer questions on the subject. Amazon, Apple and Facebook declined our requests for comments on potential antitrust issues. Google did not respond to our request. A spokesman for the Justice Department said that he "does not confirm, deny and comment in any way on the existence or non-existence of investigations." And the FTC has not responded to a request for comment.

Investors deserve more clarity. Let's start with one essential point: the probability of breaking is low. "The problem with these antitrust laws is that it's not easy to understand the harm the consumer is suffering today," says Scott Kupor, managing partner of venture capital firm Andreessen Horowitz, who has invested in Facebook. and
Pinterest

(PINS) and Slack Technologies. "If you think of the public utility of Facebook, Google, Amazon and Apple, it's not obvious that they're doing something that reduces the competition. It is not obvious that they are raising prices. "

Facebook and Google services are generally free for consumers. And one could argue that Amazon's e-commerce market has played a key role in reducing retail prices for consumers.

"The idea that Facebook, Google and Amazon have hurt consumers over the last decade is laughable," says Mark Mahaney of RBC Capital Markets, a long-time Internet analyst. Barron. "I think these companies have created a tremendous amount of convenience, savings and benefits for consumers."

Here is the breakdown by company of our regulatory risk.

Apple

Apple CEO Tim Cook said last week that the company did not have a monopoly on its markets. "Our share is much smaller. We do not have a dominant position in any market, "he told CBS News.

The numbers corroborate his statement. In the United States, for example, the company's iPhone accounted for 45% of the market in 2018, according to eMarketer.

But there is another way to measure Apple's market power, aside from hardware sales. According to analysts, any antitrust investigation could focus on Apple's typical 30% commission for each app sold on its App Store.

But even in the worst case, where the App Store is regulated, the disadvantage is relatively limited for Apple. The store accounts for about 5% of the company's sales, according to Cowen estimates.

Earlier this month, Morgan Stanley analyst Katy Huberty said that if Apple were forced to cut its app store consumption by 50 percent, it would have a negative impact on the value of the company. $ 13 per share, or 7%. Not a good result for shareholders, but certainly not the end of the world.

And before that happens, Apple would surely argue that its App Store, even with its pricing structure, actually had a supercharged technological innovation over the last ten years. The distribution channel of smartphone app stores has enabled new businesses to rapidly evolve their customer base.

"But for the iPhone as a platform, there is no doubt that we would not have had the last 10 years of innovation," Kupor says. "Uber, Lyft, Airbnb … none of this, if it's only five billion people are walking around with a super-computer in their pocket."

Google's parent, Alphabet

Google's dominance is a matter of definition – the detail that often determines the outcome of an antitrust case. While Google is leading the search engine market on the Web, the company is facing growing competition from Facebook and Amazon in digital advertising.

Internet advertising remains a minority of the global market. Digital advertising generated $ 88 billion in revenue in the United States last year, accounting for 41% of the total advertising market, while traditional media advertising accounted for $ 127 billion, according to MoffettNathanson.

"For Google, they certainly dominate in research, but they do not constitute a monopoly on the advertising market in general. And, in fact, competition is increasing with Facebook, "notes Colin Sebastian, an internet analyst at Baird.

According to IDC, Google has captured some 42% of the global digital advertising market last year, compared to 20% for Facebook. According to research firm Gartner, about 55% of searches for consumer web products are now starting on Amazon, not on search engines. The FTC has already reviewed Google's search engine. A 19-month investigation ended in 2013 without legal action.

"We consider that the vast majority of incremental regulatory risks are limited to Google's ancillary activities," said Kevin Rippey, an analyst at Evercore ISI, last week.

Rippey said the Google Play Store could be reviewed similar to the Apple App Store. He estimates that the Play Store represents about 5% of the market value of the company.

Amazon.com

Again, the definition is key when it comes to Amazon. Although it has a strong position in the United States for online sales, it still represents only a small percentage of the retail market as a whole. EMarketer estimates that Amazon accounted for 37% of US online sales in 2018 and 3.5% of total retail sales.

"Obviously, Amazon is not a monopoly. They are half the size of
Walmart
,
Said Sebastian.

Amazon has been criticized by politicians for selling its own private label products in its online commerce market, competing with other sellers. But in April, the company said that private label products accounted for only 1% of sales. The company said it did not use data from individual sellers to launch its private label products.

The problem of private labels could open a Pandora's box to all retailers. Almost all major retailers rely on private labels for a percentage of their double-digit sales. And the practice of in-store branded products has lowered prices for consumers compared to branded offers.

Facebook

Facebook has been criticized for not doing enough to fight harmful content and protect users' private data. There is no debate there. But solving these problems is not the responsibility of antitrust regulators. The company is already facing regulatory action by the FTC for its privacy breaches. Facebook has set aside $ 3 billion to cover the cost of a probable fine from the FTC.

But given the decline in stocks, investors seem more nervous about a breakup.

"These nuclear options discussed by investors and the media are unlikely," says Sebastian.

But let's always consider the potential. Mark Zgutowic, an analyst at Rosenblatt Securities, believes that if Facebook were forced to decommission its Instagram unit, it could affect by 10% the value of its action compared to the current level due to operational disruptions.

History has shown that investors do not have much to fear regarding antitrust measures. Governments tend to lose in court – like the DOJ's attempt to block
AT & T
of the
acquisition of Time Warner and its dissolution order
Microsoft

– or declare victory with minor regulations. The European Commission's case against Alphabet has resulted in fines since 2017 representing less than one-third of Alphabet's annual net income.

Alphabet's own actions suggest that society is not too concerned. Thursday, Google announced the signing of an agreement to acquire the data analysis company Looker for $ 2.6 billion in cash, subject to regulatory approval. Get these approvals? Not a big problem, it seems.

Instead of worrying about regulatory risk, investors should focus on fundamentals and price.

In this sense, Facebook and Alphabet can be the best bets. Both are trading at a reasonable 21-fold earnings estimate for the next 12 months and show double-digit growth in the coming years, fueled by a long shift to digital advertising.

Apple and Amazon.com, on the other hand, are facing slower growth in their core businesses.

In March, Barron According to Apple shareholders, Apple shareholders may want to take profits after disappointing service announcements, saying all gains in the stock for 2019 may fade as investors focus again on the decline of the iPhone business of the company.

Revenue from Amazon's online stores – the products that it sells directly to consumers and the engine of its initial flywheel strategy – have only increased by 12% in the first quarter, down from 20% at the end of 2017. The valuation of Amazon has been multiplied by 56 times. Street's estimated profit for the next 12 months does not leave much room for error.

Then there is a basket company listed in securities of FAANG tech that has not been mentioned in the potential antitrust survey reports …
Netflix

(NFLX). Not surprisingly, the stock has grown more than 5% for the week.

But with the rising streaming competition coming from
Walt Disney

(DIS) later this year, and a costly evaluation to 84 times the estimated profit of the next 12 months, the price of the company is also estimated to perfection.

Netflix may not have an antitrust risk, but again, investors could be burned by placing too much emphasis on regulatory discourse.

Write to Tae Kim at [email protected]