One of the many concerns in today’s stock market has to do with potential regulation of FANG stocks. Facebook has come under heavy criticism for not policing its social media against Russians interfering in the US elections, data privacy breaches, and terrorists posting videos murdering innocent people. Now Market Watch believes that FANG stocks are going to be “smacked down” by regulators.
Stock-market investors live by the FANGs, and they die by the FANGs.
That may be one takeaway from recent comments made by Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch. The strategist said investors should wean themselves from off the handful of fast-growing techy companies known by the acronym FANG and sometimes FAANG that represent a cadre of highfliers that have helped to supercharge the current bull market run for equities.
The stocks in question are Facebook, Amazon.com, Netflix Inc., and Google’s parent company, Alphabet. Sometimes Apple is included in this bunch and the name is changed to FAANG. The companies are world leaders in technology and especially its application to social media. And, that is where the regulatory concern lies.
Have FANG Stocks Run Too Far and Too Fast?
The opinion of the analyst from BoA echoes that of many who believe that the rally of these stocks is not sustainable, purely on fundamental and technical grounds. Their prices have been bid up based on their being the best bets in an otherwise stagnant market. But, at some point, investors will start to get out and start a stampede. The best bet according to the analyst is to take a little off the table now.
The next step for these evolving companies and technologies will be government regulation. This is a natural step as no one regulates a brand new business but regulation occurs when a business becomes large and has strong effects on the lives and welfare of the citizens of the country.
FANG stocks may have run too far and too fast from a stock market pricing perspective but they have also done so in terms of their out-sized effects on society. Thus, regulation to some degree is a certainty. The question for an investor is how does this FANG regulation risk affect stock prices and investment opportunities.
Is It Time to Regulate FANG Social Media?
An interesting view of this subject comes from the oil and gas industry, which is highly regulated. Rigzone, a publication in that industry, asks if it is time to regulate social media’s FANG.
A number of newspapers have reported that policymakers are considering various options to regulate use of personal data by various social media and internet service providers. One of the options mentioned is that of treating the social media companies as “public utilities.” This leads to the question of what criteria has been used in the past to identify a private business as a “public utility” or using another historic term as a “public service” company. Could those criteria be applied to internet social media giants such as Facebook, Amazon, Netflix, and Google? These companies are sometimes collectively referred to as “FANG.”
This sort of useful, albeit boring, discussion of what constitutes a public utility and if that designation will be applied to the FANG is basic to understanding FANG regulatory risk. In their discussion, they quote for Principles of Public Utility Rates the two attributes of a company that typically lead to regulation.
Two attributes of public utility business have received emphasis in the literature. The first is the special public importance or necessity of the types of service supplied. The second is the possession of specific physical and human assets like utility plants, distribution networks and technical expertise that lead almost inevitably to monopoly or at least ineffective forms of competition.
Thus public importance and necessity are one factor and possession of specific and special assets making competition difficult is the other.
Some already believe that social media companies exhibit both “public utility” attributes thus leading to the “necessity of regulation”. The FANG companies clearly have “special public importance” and are considered by many, due to their high penetration rates, as “necessary.” They also own tangible and intangible “assets” hard to reproduce and “networks and technical expertise” difficult for competition to develop.
A basic concern is that these companies have become monopolies and their use (and misuse) of consumer data has become integral to their operations. This threatens to cross the threshold of what is acceptable in American society if it has not already. Thus, we may see regulation of FANG companies in the national interest. What does FANG regulatory risk do to the value of those investments, their ability to make profits?
Do Regulations Kill Growth?
Regulations in the extreme break up companies, like AT&T. However, the breakup of this monopolistic behemoth ushered in an era of fantastic growth and innovation in the communications sector. On a less aggressive level, regulations may or may not impede corporate profits and growth. Pitch Fork Economics asked the question, Do Regulations Kill Growth.
Deregulation for the powerful is a central tenet of the trickle-down myth, embraced by Democrats and Republican alike. Government regulations, we’re told, are costly and inefficient intrusions that slow grow and kill jobs. But Robert Reich explains that when thoughtfully applied, regulations are absolutely essential to growing a safe, secure, and broadly prosperous economy.
This is a forty-minute discussion of the issue in audio form with an attached transcript. The discussion is focused on deregulation but the argument works for supporting a degree of regulation. The basis of the discussion is that trickledown economics do not trickle down and help anyone except the very rich. And, the follow-up argument is that a reasonable degree of regulation results in an ordered society and a safer and more prosperous financial system.
Starting with the AT&T example, we can see that the extreme case of breaking up a monopoly results in financial and societal gains not previously envisioned. Like the banking rules that so long protected depositors and the financial system, rules that control information gathering, storage, transfer, and use will help stabilize society and protect both individuals and business. The result might be a loss of power and money for the FANG stocks but a greater benefit for society as a whole. As such, those investing in FANG stocks may be wise to hedge their risk a little with investments like those that don’t lose any money, ever.