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Facebook's troubles could be the beginning of another dot-com bubble bust, economists warn

Dion Rabouin
Financial Markets Reporter

Facebook’s (FB) latest troubles with regulators may be the canary in the coal mine warning of the looming collapse of the tech bubble, say economists from BNP Paribas.

The company is facing, among other issues, a lawsuit filed on behalf of 50 million users, Congressional hearings, a probe by the Federal Trade Commission (FTC) and a $6.2 billion tax increase proposal by the European Union (EU).

Facebook CEO Mark Zuckerberg posted a statement late Wednesday laying out a set of steps the company plans to take to secure users’ data. But for many it fell flat.

BNP chief market economist Paul Mortimer-Lee and senior economist Bricklin Dwyer said that this moment may well be the one market participants look back on as having signaled the end of the technology industry’s long and substantial rise.

“There’s a lot of similarities in this cycle to the dot com boom and then bust,”  Mortimer-Lee said. “Is this the turning point that six months or a year down the line you say, ‘We really misjudged how significant this was?'”

Skirting government regulation and evading taxation

At issue is whether Facebook and tech companies such as Amazon (AMZN) and Alphabet (GOOG), which have managed to largely skirt government regulation and evade taxation, are now subject to greater oversights and much larger tax bills.

The EU’s proposal to charge companies with significant digital revenues in Europe a 3% tax on various online services would be a change from current policy that allows the companies to domicile themselves in low-tax havens and retain much of their revenue.

If approved by EU states and lawmakers, the tax would apply to large firms with annual worldwide revenue above 750 million euros ($920.9 million) and annual “taxable” EU revenues above 50 million euros.

“The digital revolution has overturned economies and it has profoundly affected the way businesses create value today,” said Pierre Moscovici, the top EU economy and tax official, as he announced the proposal in Brussels.

“Your click triggers a whole chain of commercial transactions and therefore generates substantial profits” that are not taxed by most countries, he said. “This legal loophole is no longer acceptable.”

“Long-term trouble for the sector and the broader market”

Dwyer and Mortimer-Lee argue that the change in sentiment towards companies like Facebook could bring about higher taxes and greater regulation that reduces the companies’ profits and leads to a fundamental repricing of the stocks and the overall tech sector in the market.

“[The large tech companies] are the most mobile internationally and they’re the ones that have succeeded most spectacularly minimizing their tax burden, and I think people are after them now,” Mortimer-Lee told Yahoo Finance at the bank’s midtown headquarters.

Facebook’s legal troubles could be the beginnings of the next dot-com collapse, economists and fund managers say. PHOTO: Facebook CEO Mark Zuckerberg speaks. (AFP Photo/Josh Edelson)

Peter Kenny, senior market strategist at Global Markets Advisory Group, said he is expecting to see “an utter and thorough re-examination” of how governments deal with social media.

“There’s no question that what we’re seeing evolve in the market in terms of the tech sector could spell long-term trouble for the sector and the broader market,” Kenny said. “Primarily because issues being brought to bear are so fundamental to the trust factor that is the underpinning the social contract with these companies.”

Kenny said he reduced his holdings of the so-called FAANG stocks (Facebook, Apple (AAPL) , Amazon, Netflix (NFLX) and Google parent Alphabet) about nine months ago mainly because of the stocks’ lofty valuations and an expectation that small-cap companies were poised to outperform this year.

Maybe just a speed bump

But a number of investors see this latest round of negative headlines as a speed bump for Facebook and tech more broadly rather than a reckoning.

Facebook’s (FB) stock has fallen 12% since its Feb. 1 high and is down almost 4% year-to-date. But the company’s long-term growth has been stratospheric, rising 345% since its initial public offering in May 2012. The S&P 500 has risen 111% since then.

Nicholas Colas, co-founder of DataTrek Research, believes a dramatic tech selloff on the scale of the dot-com bubble burst is unlikely because the major tech companies now have “robust business models and high levels of profitability.” He argues the solution to much of the tech industry’s problems will simply be hiring more people to deal with privacy issues rather than relying on algorithms. That may hurt profits initially, but will prove short-lived.

“To see millions of people leave Facebook or Google or Amazon seems unlikely,” Colas said.

For governments to act, lawmakers would be forced to take on the big tech companies and their massive lobbying and marketing arms, which could be quite an undertaking in an election year, said David Nelson, chief strategist of Belpointe Asset Management.

Additionally, Colas said, “elected officials know how much they rely on Facebook for their campaigns, and they don’t want to cut off that avenue for themselves.”

Politics may be a bigger problem outside the United States, though, especially in the European Union. Lawmakers there are set to phase in the requirements of its General Data Protection Regulation (GDPR), which will govern data protection and privacy in the bloc.

“Maybe this is going to make people re-look at tech and say, ‘This is the start of a process, not the end of it,’ where regulation takes profits away,” Mortimer-Lee said. “It’s clear that a number of countries are looking to raise more taxes. …They’re after [tech companies] anyway and the lack of social responsibility in guarding data means that people are going to be after them more.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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