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Even if this concerns all the digital giants, it is true that since 2019, the FTC (Federal Trade Commission) and the DOJ (Department of Justice) have focused their energy in particular on Alphabet, Facebook and Amazon.

The FTC is a government agency whose role is to protect consumers from abuse of dominance that results in higher prices or lower quality products or services. It must rely on antitrust laws and has the power to impose fines on companies. He often joins forces with the DOJ, which takes charge of the criminal aspect of the investigation. The actions of these entities can lead to the dismantling of a conglomerate of companies.

It was in the 1890s that antitrust laws were established in the United States to prevent certain groups from acquiring monopoly positions using illegal means. Among other things, these laws made it possible to dismantle the Standard Oil conglomerate of Rockefeller, which occupied more than 85% of the American oil market in the 1910s. A little later, Hitler’s rise to power in Germany, favored by the concentration of activities in a small number of groups has led the United States to support a policy of diversification and the dismantling of large groups. These laws were then abandoned for more than 50 years, especially under the Reggan administration in the 1980s, which believed that the government should not interfere in the markets. According to his supporters, the liberalization of the Reggan years allowed American innovation and world domination. According to CNBC, these ideas stuck and the number of companies listed on the US markets halved between 1996 and 2016. Mergers and acquisitions are therefore still very much in fashion, but recent cases involving the three companies bring the authorities to question whether the antitrust laws inherited from the 19th century are still appropriate in a largely digital environment.

Visibility into the future of Meta, Amazon and Alphabet seems compromised by actions taken not only by the FTC (e.g. Apple vs. Epic Games) but also by the rest of the world, such as the 8 billion euros in fines. inflicted by the European Commission on Google over the past 10 years. Especially since in the battle David against Goliath, the majority will always support David.

These phenomena may partly explain the fears of investors on these various issues. However, according to our analyst Tommy Douziech, threats of dismantling are now more of a perceived risk than a real risk. He adds that if a dismantling were to be carried out, it could lead to a revaluation of certain companies to higher levels than the current one (because the new companies created would become pure-players). He cites the example of Youtube, still consolidated into Google services at the time of writing, or Twitch at Amazon.

Operators accustomed to excellence

There are other reasons for the attractive valuation levels of Meta, Alphabet and Apple. When you study finance, one of the first things you learn is about income growth: double-digit growth is good, keeping it is better (but harder). In fact, while most companies do see their growth slow as they enter the market (they focus on costs), some are exceptions. This is the case of the tech giants which, despite their size, continue their unbridled growth in a market apparently without borders. The flip side is that operators have grown used to these excellent results. Now even the smallest deviation from expectations is paying off. This is something we see frequently with Apple and its quarterly results. Sometimes investors go even further, punishing for example the extraordinary (and well above expectations) performance of Netflix during the crisis. While the company announced 10 million new users in the second quarter of 2020 against 8 expected, it deviated by 6% in the markets. It is precisely this extraordinary achievement that investors did not like, because it is “too good to be reproduced”. Some also adhere to the saying: “buy the rumors, sell the news”. It seems that technology stocks incorporate more important results than estimated in their prices. It is not the company that surprises, but rather the analysts who were wrong. In my opinion, this lack of visibility and price volatility during earnings season can be a drag for small newcomers who want to invest in internet giants.

The world after

You might have thought of something like, “Apple will never reinvent the iPhone anyway.” Certainly, but yet, they never cease to surprise us and consolidate their domination with improvements that allow them to widen the gap with any competition (cloud, processors, IA …). These giants are cash machines, it is not too late to invest in them, but few people accept this rather bland reality.

Table 1: Alphabet’s share price, turnover and quarterly EPS

Table 2: Evolution of Apple’s share price, sales and quarterly EPS

Table 3: Meta share price, revenue and quarterly EPS

Analysts speak similarly to the debate between passive management and active management. When you fall back on such instruments, you take away the magic of the markets and the excitement of your work.

For ETFs, Burton Malkiel offers a golf analogy, already used in an article by Mark J. Perry:

“It’s true that when you buy an index fund, you give up on the golf course to brag about choosing the best performing stock or mutual fund. This is why some critics claim that indexing relegates your results to mediocrity. In fact, you are pretty much guaranteed to do better than average. It’s like going to a golf course and shooting every round at par. How many golfers can do better than this? Index funds offer a simple and inexpensive solution to your investing problems. “

By extending this analogy, and by applying it to an investment in tech giants, we then understand that there is nothing original in advising these positions. As Peter Lynch puts it so well: “No one can ever blame an analyst for advising IBM 20 years ago.” But today, and still, some analysts believe that their job is to find “the next Google”, “the next Apple”. The beauty of finance lies in this approach. However, this is reflected in the appalling statistics on the performance of the most active funds (see SPIVA study).

I wonder if the Metaverse of tomorrow will be mostly made up of new players whose names we don’t yet know, or companies whose ticker pops up in front of our eyes every morning when we turn on our computer screens. In the telecoms sector, some companies which seemed best placed to innovate suffered a setback.

These various reasons – the impression of arriving too late, the lack of interest of certain professionals and the rapid transformation of our society – can partly explain the valuation ratios of these companies. However, you will understand, these stocks can perfectly meet your expectations.

Highly exposed groups

Digital groups are very exposed to the media. They take good and bad from this exhibition. For example, recruiting is rarely a problem for these companies. Even if the working conditions of Amazon employees have been the subject of controversy, this has never been an obstacle to the development of the company.

The exposure of the digital giants has also led to many boycott calls, once again Amazon is the easy target, but Twitter and Facebook have also been called to denounce censorship, free speech or the refusal to cooperate with legal authorities to arrest users considered dangerous. As for censorship, we remember the deletion of President Donald Trump’s Twitter account after his supporters burst onto Capitol Hill. So far, these boycotts have had a very limited impact on the activity of these companies. But indirectly, it has prompted authorities to take a closer look at these overpowered conglomerates.

The leaders of these companies are also highly publicized and their entire lives are scrutinized. They must be irreproachable to avoid scandal. And the risk of scandal is very real. Likewise, insider selling can be problematic for the listing of such securities and the departure or death of a pioneer is also a risk that must be taken into account. These events have an influence that is difficult to measure on the valuation of the shares in question, but what is certain is that the risk is much more pronounced in these companies than in a group like Coca Cola, for example.


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