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A Look at Antitrust Risks for FAANG Stocks

GuruFocus.com
·8 min read

- By Julie Young

Both big tech and its micro sectors are driving the waves of the future. Thus, as we start a new year in 2021, let's take a look at how the past year has gone for the FAANG stocks (Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet's Google (NASDAQ:GOOG)(NASDAQ:GOOGL).

One key area to pay attention to for big tech at the moment is legalities and antitrust. Will a technology company that can either enforce a monopoly or heavily influence political power in the U.S. face lawsuits and/or antitrust probes from the U.S. government? There is a long list of legal risks, some old and some new, and different for each company. These include privacy and privacy and security, online payments, intellectional property and enterprise risks, among others (see bottom of article for a full list).


While legal teams may have the luxury of a high dollar budget for staying on top of all these risks, not all investors generally do when analyzing their investments. That's why watching legal developments for the FAANGs in 2021 and how their management teams handle them will be very important, not only for the FAANG stocks but for the technology sector as a whole.

FAANG antitrust suits are likely going to create strong precedents over the next year and frame the landscape for big tech going forward. Below is a look at some of the highlights for each company.

Facebook

Facebook has faced legal battles for several reasons, with the things it is accused of in court including illegal monopolization, anti-competitive acquisitions, anti-competitive platform conduct and favoritism for immigrant workers. Advertising algorithms and data tracking have also been hot topics of interest for investigators.

Facebook is currently in the midst of an antitrust case with the Federal Trade Commission (FTC) with several U.S. states as the plaintiff. In December 2020, the FTC filed a suit against Facebook claiming that over the years it has followed a monopolistic strategy in its acquisitions, seeking to essentially block competitors by acquiring them. The FTC cites the acquisitions of Instagram and WhatsApp. Facebook has until March 2021 to respond to the FTC's legal filing.

Key business risks: data usage, social media competitors, acquisition strategy, advertising algorithms

Apple

Legal proceedings most notable for Apple include the Qualcomm (QCOM) vs. Apple disputes. Apple and Qualcomm have battled for several years, with several conflicts of interest. Qualcomm is one of the largest suppliers for the cellular industry, and has demanded Apple pay royalty and licensing fees for use of Qualcomm products in its iPhones. Qualcomm has also been disgruntled over shared information and possible patent infringements.

In Germany, the German court has ruled in favor of Qualcomm, limiting the sale of Apple products in the country. Similarly, Apple has faced setbacks in China but has found loopholes for continuing its sales. In 2019, the legal proceeding in the United States was concluded with a settlement between the two parties whereby Apple decided to pay Qualcomm through a settlement and sign a six-year agreement with a two-year extension option.

In general, Apple is a frontrunner for the 5G experience. As it heads into 5G production mode, its past relationships will play a part. Apple has been forced to maintain its relationship with Qualcomm moving forward because Qualcomm is one of the best and most reliable suppliers for 5G parts.

Overall, iPhone quality, royalties, licenses, patents and patent infringements are some of the big legal risks for the company. All of Apple's products also have a substantial supply chain which can add to the potential for supplier/relationship legal risks.

Another area where Apple is evolving and also taking on more risks is in mobile data collection and sharing. Mobile advertising and mobile advertising algorithms are becoming more reliant on Apple data collection, which can potentially create some privacy challenges among other risks.

Key business risks: supply chain relationships, tariffs, patent developments and infringements, standard protocols pertaining to 5G

Amazon

Amazon has grown to become one of the largest online retailers in the world. Its legal risks are heavily focused around selling terms and seller rights, most notably intellectual property theft of popular items from its third-party sellers. Consumers and third-party sellers have also threatened lawsuits in the U.S. and Canada, accusing Amazon of penalizing sellers that offer lower comparable prices than Amazon's own listings. Some sellers also feel Amazon's pricing challenges extend beyond their Amazon listings to broader market sales as well. Claims suggest breaches of competition and monopoly laws.

Key business risks: seller terms, defective online sales

Netflix

Netflix has generally seen a lesser spotlight for legalities. However, as streaming evolves further, the Netflix business will be looked to as a leader. Legal challenges and proceedings for Netflix have pertained to copyright challenges, censorship, customer data collection, lawsuits from actors on productions it sponsors and poaching of company executives.

Key business risks: streaming competition

Alphabet's Google

Over the years, Google has faced numerous lawsuits. Currently, it has one of the most high profile and highly publicized cases among its FAANG peers. The U.S. Justice Department case is focused around monopolistic actions by Google. Ultimately the Justice Department case is focused on relationships Google has with partners that seek to elevate its own brand before market competitors. Apple is involved here since Google pays the company billions of dollars for its search engine default on Apple products.

Google's defense is that its monopolistic partnerships are legal. It also says users can choose other search engines if they prefer. It also questions if limitations on these partnerships would create confusion for consumers and decrease search efficiency overall.

Judge Amit Mehta is presiding over the Justice Department case and its proceedings. Google has submitted its response to the Justice Department's filings and allegations, denying claims of wrongdoing. Judge Mehta has requested investigation materials to be delivered to Google for further assessment. The Judge has projected a trial in 2023, suggesting that the preliminary phase of the proceedings could last two years.

Key business risks: search and ad algorithms, search engine partnerships, business partnerships in general, a heavy reliance on advertising, consumer data usage, ad pricing and coercion

FAANG returns and financial highlights

Trailing twelve month returns and financial data from Morningstar through Feb. 12 show that the FAANGs have been powering ahead despite legal turmoil. Apple is leading the pack with a trailing twelve-month return of 66.49%. This compares to a gain of approximately 45% for the Nasdaq during the same timeframe.

Share price gains:

A Look at Antitrust Risks for FAANG Stocks
A Look at Antitrust Risks for FAANG Stocks

Revenue:

A Look at Antitrust Risks for FAANG Stocks
A Look at Antitrust Risks for FAANG Stocks

Operating Income:

A Look at Antitrust Risks for FAANG Stocks
A Look at Antitrust Risks for FAANG Stocks

Net Income:

A Look at Antitrust Risks for FAANG Stocks
A Look at Antitrust Risks for FAANG Stocks

Other Notable Measures:

A Look at Antitrust Risks for FAANG Stocks
A Look at Antitrust Risks for FAANG Stocks

Acronyms and emerging ETFs to follow

Some investors may not think FAANG stocks provide an appropriate perspective on the tech market. Others can say they shouldn't be looked at in isolation. Emerging market ETFs that are heavily comprised of tech could also be of interest to tech investors, including the following:

  • Global X Social Media ETF (SOCL)

  • ETFMG Prime Mobile Payments ETF (IPAY)

  • Roundhill Streaming Services & Technology ETF (SUBZ)



Conclusion

Technology is one of the economy's most important sectors and it has historically been a top return producer for investors. In 2020, the Nasdaq Composite returned approximately 45%. Despite the big gains, the sector overall also has some big risks, including a range of factors such as privacy, security, payment networks, intellectual property, enterprise management and competition.

The FAANGs have become well known because investors want a list of top tech stocks to identify with from the haystack of tech stocks in the Nasdaq Composite. FAANGs have also notoriously outperformed the Nasdaq, helping to increase their popularity.

The trailing twelve month returns haven't showed a major retreat for the FAANGs, but that doesn't mean investors shouldn't look elsewhere or potentially expand their frontier. In addition to legal challenges, FAANG stocks have also been the frontrunners for a while, which could create opportunities for new names as the FAANG stocks top out. Very few big-name stocks remain so for more that a decade or two.

Nonetheless, the technology sector as a whole continues to evolve at a very fast pace. It is likely that the FAANG stocks will continue to dominate the tech market, specifically by market cap due to index holdings. Nevertheless, they are definitely not the only tech stocks to watch on an investor's radar.

Appendix - full list of identified antitrust risks:

  • Privacy and security

    • Data Protection

    • Advanced Technology (Artificial Intelligence) Implementations

    • Licensing and Agreements

    • Regulatory Compliance

    • Cloud Security

    • Cyber Breeches

    • Remote Work Infrastructure


  • Online payments

    • Online PaymentsCross-Border Transactions Regulations

    • Payee and Payor Data Security

    • Technical Collaborations

    • Payment Risks

    • Money Laundering

    • Identity Theft

    • Fraud

    • Account Takeover

    • Defending Against Global Unknowns


  • Intellectual Property Risks

    • Partnership Conflicts

    • Litigation Processes

    • Patent, Trademark, and Copyright Infringement

    • Cultural Practices across the Globe


  • Enterprise

    • Data Science

    • Big Data

    • Enterprise System Infrastructure




Disclosure: I am invested in nearly all of the names mentioned in this article either directly or indirectly through ETFs. I own shares of AAPL, AMZN, and GOOG directly.

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This article first appeared on GuruFocus.