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What a Facebook breakup would mean for investors

Brian Sozzi

Without question, the powerful long arm of the law is gearing up to take a big swing at the many out-to-lunch tech nerds that call Silicon Valley home. But while breakup talk around tech’s largest players such as Google and Amazon begin to swirl, it’s Facebook (FB) that perhaps is the most hot button name of them all.

And investors would be wise to realize that because of the high likelihood of some form of regulation (or breakup) befalling Facebook, the next 10 years for the stock may look quite different than the free-wheeling past 10 years.

Not only has Facebook amassed a dominating market share in social media via its namesake site and Instagram (Snapchat who?), but it has seemed the most out to lunch on addressing its problems. In fact, it could be argued that Facebook has lost complete control on how to protect user data and abuses on the platform.

Got deep-fake videos anyone?

“This is a company that dominates social media and stifles competition (it bought Instagram and squelched Snap). And it has shown time and again it has next to no control and little understanding of its platform,” wrote Yahoo Finance editor-in-chief Andy Serwer, who indeed has his pulse on what’s happening inside Silicon Valley.

“It has also been disingenuous about its problems and about fixing them. Its platform has led to deaths around the globe. It says it isn’t a media company, but its most prominent feature is called a News Feed. (Right.) Facebook Live is a mess. Facebook caused problems with our elections. How much? Who knows? Facebook doesn’t. What about the next election? Who knows? Remedy: Break it up,” wrote Serwer.

Yahoo Finance will be exploring the breakup of big tech and its impact on investors via a special series on Yahoo Finance The First Trade called “The BreakUp.” So, tune in at 9 a.m. ET. The series began Monday morning.

Suffice it to say, not everyone shares Serwer’s views on the need to smash up Facebook. Yahoo Finance senior columnist Rick Newman doesn’t think Facebook deserves a pass by any means, but argues breaking up the company won’t solve much.

SAN JOSE, CALIFORNIA - APRIL 30: The Facebook logo is displayed during the F8 Facebook Developers conference on April 30, 2019 in San Jose, California. Facebook CEO Mark Zuckerberg delivered the opening keynote to the FB Developer conference that runs through May 1. (Photo by Justin Sullivan/Getty Images)

“A breakup certainly wouldn’t make Facebook cheaper for consumers, since the service is already free. The basic idea seems to be carving off Instagram and WhatsApp, which Facebook owns, to serve as competing social-media networks. But the three services are different and one is not a natural substitute for the other. Besides, Facebook users can ditch the service with virtually no effort — or just stop using it — and they don’t seem to be doing that. In Facebook’s latest quarterly results, the number of American users remained steady and revenue rose,” Newman wrote.

“It makes sense to break up companies when they have near-monopoly market share, they provide poor or overpriced service, and they have the power to bully or eliminate potential competitors,” he wrote.

But what about the tech stocks?

Investors shouldn’t be fooled into thinking that just because the government moves at a snail’s pace — meaning tech regulation may be a ways off — that the stock prices of Big Tech won’t be hurt near-term.

“High-growth technology stocks face two key risks: regulation and valuation. Rising market concentration and the political landscape suggest that regulatory risk will persist and could eventually weigh on company fundamentals,’ cautions Goldman Sachs strategist David Kostin.

Kostin’s research shows that when government has attacked Big Tech in the past (think Microsoft (MSFT) antitrust situation), financial results and stock prices have come under pressure.

“Uncertainty surrounding potential litigation is high, but historical precedent suggests that investors should reduce exposures to targeted companies in the event of an antitrust lawsuit. The impact of regulation on today's stocks will be case-dependent, but three commonalities stand out among the historical examples (1) valuations and share prices declined between lawsuit filing and resolution, (2) the cases took years to resolve, and (3) sales growth slowed following resolution.” Kostin explains.

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