When it comes to internet and big tech in the US and China, “focus on fundamentals,” says Mizuho Senior Equity Research Analyst James Lee. Regulatory concerns for the internet industry remain, however recent history underlines that new regulations do not appear to have a long term, negative impact on stocks.
Regulatory Concerns Overblown
Last year’s settlement between Facebook and the FTC led the social media giant to eliminate age, gender, and income targeting in advertising for housing, employment, and credit. For an arguably meaningful change in how they operated, business wasn’t meaningfully affected, given the availability of data from alternative, third-party sources.
In 2015, Google settled with the EU following a multi-year investigation into preferential search algorithms. Despite having to pay $2.7 billion in fines – the largest antitrust fine ever issued by the European Commission – the settlement had limited impact on the company’s growth, and the search engine maintained more than 90 percent market share.
GDPR - the EU’s ‘General Data Protection Regulation’ which transformed the regulatory landscape for businesses across Europe – has had only temporary impacts on both the tech and social media giants.
According to Lee, antitrust scenarios also seem unlikely given the high bar that was set following AT&T’s breakup during the 1980’s. The telephone company controlled the technology supply chain and charged consumers for services for which, at that time, there were no meaningful alternatives. Companies like Facebook and Google, in contrast, don’t charge consumers for their services, and alternative options are available, albeit on a smaller scale.
Lee also advised that, when dealing with large tech companies, the Government should be careful not to designate them as the industry standard. By doing so, Facebook, Google, and Amazon could become even more dominant, since smaller internet companies are not equipped financially to take on similar levels of compliance.
Regulatory restrictions on games and finance also dragged the sector down in 2019. The significant slowdowns of game approvals and the negative reporting from peer-to-peer (P2P) companies on Consumer Day hurt topline growth for the year, but Lee expects these regulations to be lapping this year.
With regulatory concerns overstated – and largely baked into the companies’ stock prices – Lee reminds investors to focus on fundamentals, which generally look positive.
Road to Recovery
2019 was a difficult year for internet advertising in China as a result of competition, regulatory impact, and a slow moving economy. Lee expects a turnaround in 2020, and that the sector will lean increasingly toward advertising and away from ecommerce throughout the year.
Lee’s positive outlook is due in part to a de-escalation of trade tension between the US and China. With Phase I of the bilateral trade agreement having gone into place February 14th, ad agencies and platforms are indicating a more positive year ahead.
In summary, the US and China’s internet markets are poised for a rebound, valuations are overly discounting the risks in the market and Mizuho’s Lee maintains high hopes for the year.
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