With the new government coming into place, stringent technology regulation is becoming more likely – becoming compliant on antitrust issues is heating and speeding up. This could hold back main technology indices, but even more scary is the large pocket of smaller technology companies with very elevated valuations. Going forward, the valuation model for technology companies, which is function of growth, risk-reward on the technology developed, the variance on earnings, and the discount rates, could be questioned.
We assume that, as long as the 10-year interest rate remains at or below 1 % p.a., the bull run of technology companies may well continue. As we head into 2021, one could imagine that input prices would rise once the pandemic is under management. If so, this could be the starting point to a broader price adjustment as the 10-year interest rates may re-adjust.
Yet, the real issue for technology stocks is not necessary in the sudden rise in input prices. We consider that the recent US Federal Trade Commission’s lawsuit filling could have a much bigger and a more immediate impact to share price valuations. Remember, the lawsuit aims at breaking up some of the technology companies because of antitrust issues. How regulation will impact profitability is still highly unclear, but investors need to pay attention to it because it could change the entire technology sentiment going forward.
Once the concerned company is Facebook which is holding Instagram and WhatsApp. In recent trading session, FB was down, but not more than the average market. So, is the market ignoring the eventual compliance concern? If Facebook’s business were to be broken up it would be a big blow as Instagram generated some $20bn in revenue in 2019 and thus account for almost 30% of the overall business in addition to being a key driver in the future growth of revenue. While WhatsApp is not generating meaningful revenue for Facebook it is a potential future revenue driver.
And today, Financial Times is writing about a new EU draft regulation on big technology companies operating in the EU. If a technology platform has more than 45mn users, it will now be categorized as a systemically important technology platform which will have special obligations to shape information flows. Failing to comply with the new rules could end in fines of up to 6% of their annual turnover. No matter where you look regulation and rules will be applied against the biggest technology companies in the coming years. The main question is how it will impact these companies’ profitability and growth trajectory. While valuation will adjust upon announcement of major changes, investors will have to time adjust their portfolios accordingly.