So-called FAANG stocks have been among the clear winners of the pandemic, extending their lead over the rest of the S&P 500 and pushing the index to near record levels.
Big tech generally has reaped the benefits of the boom in areas such as ecommerce, homeworking and streaming. The latest quarterly earnings bear this out: Tesla’s Q3 revenues almost doubled and the company extended its run of profitability for a fifth quarter.
Meanwhile, analysts expect this year’s Prime Day on 13 October to bring in a record $9.91bn for Amazon in global sales, which would represent a 43 per cent increase on 2019.
But can this winning streak endure? Valuations already look stretched.
Amazon now trades on a 128 P/E ratio and we may see an economic downturn that can impact earnings across the board. Looming political and regulatory risks also pose existential threats for big tech, both in the US with the Presidential elections, but also from regulators in the EU and UK.
The coming downturn brings a twin threat, in the form of reduced advertising spend that is the bread and butter of Facebook and Google’s business, but also from reduced consumer confidence that could hurt spending, both for bricks and mortar retailers as well as ecommerce.
The global economic downturn twinned with the massive support rolled out during the pandemic also means that government deficits are approaching a turning point and will need to be reduced.
Government data shows the US’ budget deficit alone increased to a record $3.1trn in the fiscal year to 30 September, and that will have to be paid back through higher taxes in a low inflation environment.
We have already seen EU members turning the screws on the FAANGs in order to boost their coffers. France has threatened to introduce a digital tax, while the European Commission has taken the lead in the bloc’s clampdown on Ireland’s sweetheart tax deal with Apple.
Looking across the pond to the US and its upcoming election though is less clear cut; a Biden victory could see the corporate tax rate increase to 28 per cent from 21 per cent, while a Trump win could lock in his flagship tax cuts.
Perhaps it is this binary outcome from the November elections that is so interesting for the tech sector, and not just in terms of taxation. Regulation is arguably a much bigger issue for them and their investors.
Biden will be keeping the Zuckerbergs of the world up at night, having told the New York Times in January that he had “never been a fan of Facebook” as part of a wider point that online platforms should not be held responsible for the content that users post in review of the rediscovered Section 230.
Crucially, the Democrat candidate has also previously called for the dismantling of large technology companies, suggesting that they look to unwind their previously approved “illegal and anti-competitive” mergers in what would potentially look like a similar process to that of the Standard Oil act.