Which is real? And which is really real, I mean, earnings-per-share real? When Big Tech goes to Washington, you have to worry about what's headline risk and what's EPS risk -- and the gulf between the two is huge.
I want to start with a very critical quote from the head of the antitrust subcommittee, David Cicilline, a Democrat from Rhode Island that I heard yesterday: "In an effort to promote and continue this new economy, Congress and antitrust enforcers allowed these firms to regulate themselves with little oversight. But as a result, the internet has become increasingly concentrated, less open and growingly concentrated hostile to innovation and entrepreneurship. "
Because regulated businesses tend not to make as much money as non-regulated businesses. I used to joke about the irrelevance of extraneous events to some stocks -- the "what does that have to do with the price-to-earnings ratio of Bristol-Myers Squibb (BMY) " theorem.
These have potential earnings per share implications and are most certainly P/E multiple shrinkers.
Also not good?
Cicilline is a Democrat. The Republicans are already predisposed to dislike these internet titans because they are perceived as one giant, liberal squid choking off discourse and making profits for their CEOs who then give to Democratic candidates. They are under assault by both parties as we saw from the ill-advised Libra foray by Facebook. They are uniters, uniters against themselves.
Second negative? The media. News narratives are set by the New York Times -- which has done amazing reporting on Facebook, admittedly amazingly negative, and by Fox News, which is anything but a friend of the web.
Third negative? Age. Many of these politicians are so old and out of it that they seem to be from the flip phone days. Others need their kids sitting with them at these hearings. I would like to ask these people if they have ever heard of Roku (ROKU) or Pinterest (PINS) .
Yeah, the internet is no place for old men -- or women, either.
Next negative? Bought friends. What is it about this industry that it doesn't know you need to have some congressional mindshare. Not only does every district have people who have livelihoods wiped out by these companies, but none of them is paying the freight that say, the managed care industry does, or the pharmaceuticals. Most of the web companies -- with the exception of Amazon -- are concentrated in California. They have way too little influence elsewhere. Amazon's brilliant move to have a bunch of headquarters would have blunted this. But Queens blocked Bezos and he only picked up Virginia. Not enough voters. Not enough money.
Final negative: lack of public, well-known and well-respected grown-ups at the top that actually CAN'T BE BOUGHT. These internet companies have systematically refused to get senior hands in from the outside who are trusted by Washington. To me, the smartest thing that CEO Dara Khosrowshahi did when he joined Uber (UBER) was hire Tony West as general counsel. West was the former general counsel of Pepsico (PEP) and before that the Associate Attorney General of the United States, where he went after the big banks for their sins during the Great Recession. Best resume ever for these matters and anything but an empty suit. A real enforcer.
Like it or not, Uber had been considered a "dirty" company by many authorities because of the reckless ways of Dara's predecessor, Travis Kalanick. Don't hear much of that anymore, do you? Uber's still an aggressive company, but West has given the company bearing and is known in Washington as someone who would not trade his reputation for money.
Now when I look at these firms, I always think, "does anyone know you need a West at the top, someone with a regulator's mentality, to be sure that you don't run afoul of the regulators?" These places need more political operatives, more ex-congresspeople, more sports heroes for heavens sake! Even the banks know that. What do these firms not get that Uber did?
With that important backdrop, let's do some quick handicapping.
First, Alphabet? While my charitable trust, Action Alerts Plus, owns Alphabet, as well as the other two, and we've made great money for the trust doing so, I think Alphabet has real EPS risk here. Alphabet, in many ways, reminds me of Microsoft (MSFT) of old: You can't get away from it. Google determines what you read first and often what you buy first and what you learn first. It's also what you might see first, if it is on Youtube. That means it -- I think unintentionally, for the most part -- intrudes into free speech and that gets them in the crosshairs of both sides.
One of the reasons why I like the stock of Alphabet so much is that almost-monopoly-like power earned by its own ingenuity. But as long as the company doesn't have someone at the top policing all the cases where Alphabet may be seen as being too powerful, I think these guys have real earnings risk, as they will be urged to rein in power or be broken up. The good news? The stock has a low multiple. The bad news? While Peter Thiel's call for a McCarthy-like investigation into their ties to China seem off-base, I don't think it is so off-base to wonder how the queue works, how coercive and powerful Alphabet can be and whether it can change its ways. I, personally, love everything about Google, from its search to its maps to its operating system. They haven't put me out of business. They haven't exposed me. They haven't done anything to me.
But I am not your grieving constituent. I think there's real EPS risk here. The company has to find a way to self-examine -- not by cheap AI but by expensive, harsh humans, and that's expensive. They have the money. I know they don't want to slow down the innovation. But they lack a powerful, well-known outside counsel who can tell them what's right or what's wrong or we will need sum-of-the-parts analysis here. I couldn't believe that some no-name Alphabet guy was answering questions on the Hill about Chinese Communist infiltration. Can they be that tone deaf? They need hitters to get them out of this jam.
Fortunately, it has a low multiple.
Amazon? Oh brother. These guys have big brother in Alexa. They have wiped out many a small retailer. They have the power to steer to their own goods.
But they also have some friends. I bet every single congressperson knows and loves Amazon and many have Amazon facilities in their districts -- the political advantage of nation-wide scale! They also have Amazon web services, which has got to be the single greatest empowerment tool for small business around. Plus, Bezos owns the Washington Post. How brilliant is that? Amazingly, given how Amazon's been like Walmart (WMT) in crushing smaller retailers, I think this one's in the best shape in America. It's being investigated by the EU, but it just made a brilliant settlement with German authorities to change its terms of business to appease aggrieved sellers and I think that those changes will immunize the company. Worse that happens? Check please!
Finally, the most ironic of all, Facebook. It sure didn't buy much for that $5 billion to the FTC. It decided to go from the FTC frying pan into the Treasury fire with Libra. Talk about self-inflicted forced error. Once again I have to insist that they bring in an unassailable outside figure with some credibility -- can't they find a retired Federal Judge to become something like a court-ordered monitor before the government does it for them.
Why aren't I more fearful, other than the fact that their Instagram business is on fire? Because I have a plan for them. Drop Libra -- even as I liked the concept. Go buy Square (SQ) for $70 billion -- hundred percent premiums do not get rejected -- and blow it out worldwide. Square takes bitcoins. That's a start. Why not tinker with bitcoin once you have bought Square, talk about how Square Cash is great at empowering beloved small business and away you go!
I am not being glib here. Washington is a P/E-lowering event for all of these companies. What I am saying is if you impact free speech, as Alphabet does, you are going to have to have an earnings' hit if not break-up risk. If you impact commerce and lower prices -- Amazon -- you are going to have a small earnings hit -- a fine -- but new relatively painless rules, like those agreed to in Germany, And if you are Facebook? Come on guys, drop Libra, go buy Square, get a distinguished former jurist in the house and the rest could be history.