Wall Street analysts doubt feds will split big tech

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FAANG stocks displayed at the Nasdaq.

Adam Jeffery | CNBC

A group of Wall Street analysts are flagging the risk of more regulatory scrutiny for big technology companies. But for the most part, they have doubts that Facebook, Amazon or Google-parent company Alphabet would really get broken up.

In notes to clients Tuesday, analysts from Baird, J.P. Morgan, Raymond James and others acknowledged the increased oversight as a drag on tech stock prices. Over the long-term though, they said it’s unlikely that government officials go as far as forcing companies apart.

“Breaking up is hard… and unlikely,” Baird senior research analyst Colin Sebastian wrote in a note to clients Tuesday. He said the likelihood of “nuclear options” such as forced break-ups or exposing search or feed algorithms, remain “fairly low.”

Major tech stocks tumbled to start the week after reports that the Justice Department is preparing an antitrust probe of Google. On Monday, Reuters reported that the same department has been given jurisdiction over Apple’s practices as part of a broader review into the behavior of tech companies, while Federal Trade Commission has reportedly assumed oversight of looking into Amazon and Facebook’s effect on competition.

Shares of Facebook and Google parent Alphabet lost a total $130 billion in market value and sending the Nasdaq into correction territory. In the aftermath, some Wall Street analysts chose to look on the bright side and point to the fact that these probes are in early stages. No fines or changes in business practices are expected anytime soon.

“Overall, it is difficult to know the exact path of increased scrutiny around large tech companies or the timeframe, which could be multiple years,” J.P. Morgan analyst Doug Anmuth said in a note to clients. “Valuations look more attractive at current levels… but we recognize that antitrust scrutiny will remain an overhang across the mega-cap names.”

Political pressure

That scrutiny has become a headline issue in the 2020 presidential campaign. In March, senator and presidential candidate Elizabeth Warren unveiled the clearest proposal to limit the growth of Silicon Valley. Warren’s campaign even paid for a billboard in San Francisco, tech companies’ backyard, reading “Break Up Big Tech” in all capital letters. Another Democrat and presidential candidate, Amy Klobuchar, D-Minn., has floated legislation to protect consumer data amid concerns over Facebook sharing information with third-party companies. On the other side of the political spectrum, President Trump has long criticized Amazon CEO Jeff Bezos, and argued that social media platforms look to silence conservative voices.

Part of Democrats’ argument is that tech conglomerates are anti-competitive and therefore, hurt consumers. But analysts at MoffettNathanson told clients that consumer-protection argument won’t hold up.

“Given that the services provided by Facebook, Google and Amazon are either free or have created more efficient markets, it is difficult to argue and win a consumer harm argument,” the firm said in a note to clients, adding that they don’t “have a strong belief that we will see meaningful antitrust enforcement action in the near term.”

Baird’s Colin Sebastian also highlighted the fact that these services are free. The fact that the “growth of Facebook and Instagram, and to a lesser extent Amazon, “created more competition for Google in recent years, would seem to dilute arguments that the ‘duopoly’ is unfriendly to consumers,” he said.

Either way, MoffettNathanson said actions at the state level for more online regulation will “force the federal government to find a bipartisan national solution by 2020.” And while there have been some proposals by senators and House members, “we are a long way from a new regulatory framework,” the firm said.

Google ‘most at risk’

Of the big tech companies, Raymond James analyst Aaron Kessler said that Google “is most at risk” given the history of fines by the European Commission.

“Even with increased scrutiny in Europe, we believe fines have been relatively immaterial to Google’s market cap as well as fundamentals, Kessler said. “We think the antitrust cases against Facebook and Amazon are much weaker.”

Oppenheimer analyst Jason Helfstein echoed that sentiment, and said it would be even more difficult to accuse Amazon “of anti-consumer behavior, given its constant focus on reducing aggregate prices of items and services for consumers.”

As for Facebook — given the amount of scrutiny it has already gone through publicly because of data breaches, Helfstein said he would be “surprised if existing information in the public domain is enough to pursue the company.” Facebook CEO Mark Zuckerberg has even openly asked for more regulation to help clarify rules about privacy, data and content.

Analysts at Nomura said concerns over the potential DOJ inquiry “overshadowed the noteworthy developer conference” for Apple Monday.

The likely outcome is that future acquisitions of size will be much harder to do — though Raymond James’ Kessler said most investors were already assuming this to be the case.

“While we expect investigations could persist for a while, we believe in the absence of material fines or action, investors will focus on core fundamentals, which we believe remain solid for Google, Facebook, and Amazon,” Kessler said.

— CNBC’s Michael Bloom, Ari Levy and Tom Franck contributed reporting.



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