Growth expectations for Facebook, Apple, Amazon, Netflix, Google and Microsoft continue to be exceedingly optimistic with very high price-to-earnings ratios. But momentum depends on whether results in coming quarters meet forecasts.
THE global minimum tax agreement and persistent anti-trust moves by the US, Europe, Australia and other major economies may well have an impact on Big Tech profits.
Share prices of the so-called FAANGM group of companies – Facebook, Apple, Amazon, Netflix, Google and Microsoft – have fallen slightly below their recent all-time peaks.
According to traders and analysts, market participants have shrugged off government regulatory actions. They also appear to be ignoring moves to draw the huge companies into the 15 per cent minimum corporate tax net.
The companies have done exceedingly well during the pandemic, and their share prices have reflected that. Using their stock prices just prior to the pandemic as a base instead of the March 2020 crash, Amazon has soared by 86 per cent to its recent high, Apple by 84 per cent, Google (which trades as Alphabet) by 69 per cent, Facebook by 61 per cent, Netflix by 56 per cent and Microsoft by 49 per cent.
With the exception of Netflix, which has fallen by 11 per cent from its record high, declines of all the other tech giants mentioned above are down by only 2-6 per cent.
How FAANGMs affect the entire market
According to US market economist ED Yardeni, the market value of these six stocks exceed $9 trillion and account for a quarter of the S&P 500 market capitalisation.
Growth expectations continue to be exceedingly optimistic, so price-to-earnings ratios of Amazon are very high at 68, Netflix at 66, Apple 33, Google (Alphabet) 32 and Facebook 29.
The majority of analysts expect heady growth in profits to continue. Other traders fear a sell-off if earnings do not match expectations. Since the FAANGMs account for such a large proportion of the S&P 500, there is a risk that if they tumble, their fall could cause a correction on Wall Street and potentially other markets.
Regardless of market response to the latest results, a fog of uncertainty could dim future profit growth and cause price earnings multiples to shrink.
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Biden Administration, EU and others are chipping away at monopoly power
FAANGM directors will draw on the expertise of top accountants to limit tax increases. But despite the advice, likely higher tax will cut earnings and cash flow.
The battles against anti-trust and other regulation may also chip away profits. Fines, legal and lobbying expenses are already rising.
In early July US President Joe Biden issued an executive order to carry out anti-trust actions against several industries.
His anti-trust adviser is Tim Wu, a Columbia University law professor. His latest book, The Curse of Bigness, argues that giant corporate monopolies represent not merely an economic burden on the American economy but “yield inequality and material suffering, feeding an appetite for nationalist and extremist leadership”.
The Biden administration also appointed Lina Khan – an outspoken critic of Big Tech – as chair of the Federal Trade Commission (FTC).
As a Yale law student, she published a paper titled Amazon’s Antitrust Paradox that discussed market power of Big Tech companies and their platforms.
The FTC sued Facebook in December last year, accusing the social media platform of breaking antitrust laws by purchasing Instagram and WhatsApp.
Facebook has demanded that Ms Khan be removed from the anti-trust case against it on the grounds that she was not impartial.
When Mr Biden met European Union leaders and officials in Brussels last month, he discussed competition policy.
Margrethe Vestager, the EU’s anti-trust regulator, foresees greater alignment with the US on competition enforcement, particularly in the tech sector.
The latest example was France’s 500 million euro ($590m) anti-trust fine against Google. Following Australia’s policy, French anti-trust authorities alleged that Google had ignored an order last year to negotiate a licensing deal with publishers to use content.
The case is one of the first attempts to apply a new European Union copyright directive to force Internet platforms such as Google and Facebook to pay news organisations for their content.
© Neil Behrmann. This article was first published in The Business Times Singapore . For other Asian and global articles try https://subscribe.sph.com.sg/publications-bt/