Last week the US Senate confirmed the appointment of Lina Kahn as chair of the Federal Trade Commission (FTC). A lawyer and academic known for her antitrust research, Kahn is the youngest ever chair of the department responsible for policing the US’s biggest corporations.
With Kahn at the helm of the FTC, companies hailing from silicon valley could finally be held account for their antitrust and anticompetition practices. The organisations likely to be first to garner Kahn’s attentions are those Big Tech household names that hog much of the media headlines.
It is not just headlines that Big Tech hog. They also hog much of the weight of US indices, in particular the Nasdaq100. Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOGL, GOOG), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT) make up approximately half of the weight of the Nasdaq100. As such, some argue they are a little too big. All the above examples have operations spanning multiple disparate industries and find it a little too easy to stifle innovation and competition by buying up rivals as they emerge.
Khan has already indicated that she plans to apply special scrutiny to the Big Tech players in her role as FTC chair. Support for her security could find cross-party support as her stance on Big Tech was widely known by democrats and republicans alike before her confirmation as FTC chair. If United States Democrats and Republicans can agree on anything, it might be in regard to the need to rein in Big Tech.
Kahn’s scrutiny could extend as far as proposing and bringing forward action to break up some of the Big Tech companies into several smaller, more manageable companies (from a regulatory perspective). If this is a road that Kahn and her team push down, whether eventually successful or not, we can expect a high level of uncertainty and instability in the Nasdaq100. As of writing (Thursday 24/06), the Nasdaq100 hit a record level above 14,200, largely on the back of the growth experienced in Big Tech. This could be a case of 'the bigger they are, the harder they fall'.
One of the first events the FTC will be scrutinising during Kahn tenure is the acquisition of MGM Studios by Amazon. Typically, the FTC would share responsibility with the Department of Justice to review the proposed Amazon-MGM merger. However, it is said that the FTC lobbied for the right to examine this merger as it already has an open investigation into Amazon’s antitrust practices.
It appears that Kahn has already begun to apply her special level of scrutiny to the Big Tech behemoths. However, as it stands, the market is yet to react to Kahn's appointment. In fact, Big Tech have never been more popular with investors (MSFT recently joined Apple in the $2 Trillion club), while the Nasdaq is hitting fresh intraday records every other day.
Nothing beats an old fashion conglomerate. Last week, we talked about the social media conglomerate we have all come to know on Facebook. However, the business we’re going to be talking about today dips its fingers into many industries. Reliance Industries Limited is an Indian multinational conglomerate with assets in Energy, petrochemicals, textiles, natural resources, retail, and telecommunications. They generated over $92 Billion in the past year, with their diversified investments into 5G and technology flourishing as their hard investments in oil and retail take a hit.
At the helm of the conglomerate is CEO, Mukesh Ambani, who owns almost 48% of the company. He is one of two sons of the founder of Reliance Industries, Dhirubhai Ambani. Mukesh has been CEO since 2003.
Reliance has been taking full advantage of depressed prices due to the pandemic to shore up their balance sheet, raise capital, and invest in businesses. Amid the pandemic, Reliance turned net debt negative (cash on hand is more than debt needed to be serviced), raised $20 Billion from the likes of Google and Facebook by selling stakes in Jio, their telecommunications arm and has plans to use all that capital to invest into acquiring online retailers. Their telecommunications investments are starting to flourish, and with their healthy balance, excellent leadership, and further investments, they are poised to generate high returns for their shareholders in the future.
They may be investing in tech-oriented businesses – however, this distracts from the fact that the other parts of the conglomerates are struggling. A $15 Billion oil deal with Saudi Aramco was put on hold after oil prices took a massive hit, alongside their retail and financial services segments also taking a beating due to the Coronavirus. Their tech assets may be flourishing. However, their other investments are not. Yet, the market has seen to discount the struggling parts of the businesses, with the stock price up 40% for the year. For reference, Facebook is up 25% year to date alongside beating earnings expectations. The market has put a premium on the excellent leadership and healthy balance sheet. However, we may see this reverse if the other parts of the conglomerate continue to show declining profits. The stock currently trades at around a 31 times earnings premium – something akin to a tech stock, which this is not.
An excellent example of a conglomerate adapting to the change in times (ahem. General Electric), Reliance Industries is an excellent company with exceptional leadership. What’s not so good is the price, which is quite expensive for a business with significant investments in non-performing sectors such as oil and financials. Investors may want to wait for a pullback before considering investing in the company.
Fed's Chairman Jerome Powell has a clear message: They will not step off the gas when it regards stimulus. He stated in the previous Fed meeting, "We are not thinking about thinking about raising rates." Today? "We are not thinking about thinking about THINKING ABOUT raising rates." The Federal Reserve left rates unchanged, fluctuating from 0 to 0.25%.
Fed will continue to leave all support lines open, including bond-buying, low-interest rates, and dollar swaps for the foreseeable future. However, Chairman Powell states that the fed "[has not] looked at buying equities" and that they "[the fed] aims to ensure a strong recovery and to limit the damage." The Fed plans to keep on propping up the economy, no matter the implications/effects on the economy.
Jerome Powell also praised the banks stating they "have been a source of strength in this crisis" and that "banks are well-capitalized and strong." The conference drew minimal but expected moves from the market—gold slightly up while downwards pressure was placed on the dollar against major pairs. Equity markets edge sharply higher with the NASDAQ finishing at.
While Chairman Powell spoke, a battle at Capitol hill (virtually) was ensuing against Congress and the CEO's of the 4 of the biggest tech companies: Google, Amazon, Facebook, and Apple. As they have grown to a collective market cap of just under 5 trillion dollars, they all have faced increased scrutiny regarding their market power and anti-trust issues.
CEO Jeff Bezos has been taking most of the brunt from congress as comments from the subcommittee grills him about anti-competitive practices on Amazon. With Bezos being the only CEO of the four that has not been to a congressional hearing, he has been relatively flustered with the questions, with Bloomberg Technology Reporter Spencer Soper stating that he is "clearly rattled, stammering quite a bit under tough questioning."
It is not Mark Zuckerberg's first rodeo dealing with congress; he has testified previously, usually when Facebook attracts a lot of heat re: Cambridge Analytica scandal. He got scrutinized over their acquisition of Instagram, saying that they bullied the Instagram founders by showing them a product they were going to release called "Facebook Camera" if they did not sell the business to them. This continues with Snapchat, bullying CEO Even Speigel that he [Zuckrberg) would try to destroy the app if Speigel did not sell to Facebook. Mark Zuckerberg's response essentially states that Facebook copied a lot of competitors' features.
Google's CEO Sundar Pichai is fending questions regarding the grip Google has on their users' online lives as they control much of the Search, Email, Video, and Directions space. So far, Pichai has been the most defensive, using techniques to redirect questions and answering half questions. However, this seems to be enough for congress as they don't seem to be pushing hard on Pichai.
Apple's CEO Tim Cook got away with three and a half hours into the testimony, only being questioned about the App Store once. However, post recess, they continued to grill Cook about the accepting and rejecting of apps. However, it seems like congress is clutching on straws with no footing to substantiate the claim that Apple is engaging in unfair practices. They are struggling to shake Tim Cook. This is compared to Amazon's CEO Jeff Bezos, who has been repeatedly flustered with the questions thrown at him.
There is a lot of going on this week, which means a lot of volatility in the markets—trade safe, Trade Cautiously.
Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?
To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years
We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),
They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?
With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation.
PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”
Are you joining the tech stock rally?