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.
We have already seen EU members turning the screws on the FAANGs in order to boost their coffersAmazon 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.
Let’s momentarily ignore Biden’s clear lead in the polls. What would a Trump victory mean for Big Tech?
The Republican party is planning hearings this week to grill Twitter and Facebook executives for allegedly censoring the president’s tweets during the election campaign.
Only on Tuesday last week, the Trump administration announced that it is suing Google in what will become the largest antitrust case against a tech company in more than two decades.
It is remarkable and worrying for tech investors that this is the one issue that Democrats and Republicans can agree on – big tech has grown too big.
Geopolitical realities may limit Trump’s attacks on big technology. A second Trump term could see a deepening cold war with China which has already hit the technology sector.
Crackdowns on TikTok and Huawei are bifurcating the global tech landscape into two systems – with China and the US on opposing sides. Post-election, Trump, should he succeed, will need to champion and protect US tech more so than ever.
Canny stockpickers who carefully screen for ESG risks will have spotted many of these vulnerabilities inherent in big tech long ago.
While big technology stocks may often score highly on the environmental side (so long as you ignore Apple’s controversial record on sourcing rare earth metals), they can score poorly on societal and governance KPIs.
Minimum wages and zero hours contracts at ecommerce retailers have made them a target for organisations fighting for better working conditions. Social media companies have a sustained poor record in preventing the propagation of fake news and foreign interference in elections.
And on top of all that, many tech companies pay disproportionately low taxes. It is clear regulators now plan to do something about these issues.
How should investors prepare for this looming crackdown? Possibly by considering going underweight big tech and overweight smaller tech. There is a rich universe of mid-sized tech companies that boast all the advantages and none of the disadvantages of their behemoth peers.
Taking ecommerce as a sector; it is hard to ignore the likes of Etsy, Chewy and Shopify, who have done well to chip away at Amazon’s sales by helping to connect small businesses and craftspeople directly to consumers, boosting opportunities for personalised product offerings away from Amazon’s core consumer staple offering.
They enjoy similar growth rates, even faster in some cases, and remain too small to attract the attention of monopoly-busting regulators.
Elsewhere, we like Lemonade, and believe this insuretech platform will eat away at the bottom line of traditional, outdated insurance firms.
Likewise, we like education or edutech companies such as 2U or K12, the online schooling companies all of which will continue to disrupt traditional “bricks and mortar” education providers.
Ultimately, while the FAANGs may be at a crossroads, there are still other roads investors can choose to take.
Tancredi Cordero is founder & chief executive of Kuros Associates
