The DOJ’s lawsuit against Google offers more reasons for investors to embrace Big Tech than to avoid it

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Tech giants have been investors' chosen haven during the past few months of market turmoil and the recent drama around Alphabet Inc. demonstrates some of the reasons why.

On Tuesday, the U.S. Department of Justice filed its fiercest antitrust action in more than two decades. Its lawsuit alleges that Google LLC, which is owned by Alphabet, is abusing its dominant position and blocking potential competitors in the internet search business.

The market wasted no time in rendering its own judgment on the case. Instead of falling, Alphabet’s stock price jumped and continued to rise on Wednesday. The overwhelming reaction to the landmark antitrust assault amounted to a big shrug – and maybe a little snicker.

Disagree if you will, but many investors now believe Big Tech is so powerful it can chuckle at government’s efforts to rein it in. This is not an entirely unrealistic opinion and shows why so much money over the past few months has poured into Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet.

These companies, known as the FAANGs, have emerged as the pre-eminent refuges of the COVID-19 era. Forget traditional havens such as gold (up 27 per cent this year) or long-term U.S. Treasuries (up 17 per cent). The best place for investors to take shelter from this year’s economic storms has been in Big Tech.

The NYSE FANG+ Index, which tracks the FAANGs as well as other tech-related superstars such as Tesla Inc., has rocketed 80 per cent since New Year’s Day. At a time of near-zero bond yields and unpredictable COVID-19 outbreaks, Big Tech has offered security (because these businesses dominate their chosen sectors), predictability (because they generate big cash flows that don’t swing with the economic cycle) and the prospect of even bigger returns ahead (because revenues are still surging).

As Ian Harnett and David Bowers of Absolute Strategy Research Ltd. in London recently wrote: “What is there not to like about quasi-monopolies earning super-normal non-cyclical earnings against a backdrop of ever lower discount rates?”

Given tech’s structural advantages, this week’s antitrust suit looks like a passing worry. The core of the case is the allegation that a “web of exclusionary” tactics has allowed Alphabet’s Google unit to thwart potential competitors in the search business.

According to the Justice Department’s filing, Google pays billions of dollars a years to handset and browser makers, as well as mobile phone companies, to make Google the default search option on their products.

The lawsuit alleges these deals create “continuous and self-reinforcing monopolies," while preventing competitors from gaining the scale they need to compete with Google.

Indeed, this seems to be reasonable grounds for concern. On the other hand, the company’s response sounds reasonable, too. “People use Google because they choose to, not because they’re forced to, or because they can’t find alternatives,” wrote Kent Walker, the company’s chief legal officer, in a blog post.

The case could drag on for years. But any potential remedy seems unlikely to result in a breakup of Alphabet, as some critics have suggested.

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Even a highly critical recent report on Big Tech’s anti-competitive practices by the antitrust committee of the U.S. House of Representatives stopped short of recommending such bust-ups. Instead, it urged stiffer penalties for unfair competition as well as putting limits in place to stop the tech giants from sprawling into adjacent businesses, poaching ideas and squashing upstart rivals.

One challenge to restricting the core operations of many of these companies is that they are natural monopolies with high startup costs and powerful economies of scale. Most Big Tech icons also benefit from powerful network effects in which each additional user enhances the value for other users. All of this makes it difficult for a regulator to cut them down to size by simply dismembering them.

Even more challenging is building the case that Alphabet and other tech giants are hurting consumers. Most deliver many consumer services at no charge.

Instead, critics of Big Tech argue it is the total economic impact that regulators and legislators must consider, including the chilling effect these companies have on innovators and startups. Big Tech is so dominant, the argument goes, that it sucks all the oxygen from the room.

That is an eminently reasonable concern. Viewed from another perspective, though, Big Tech’s acknowledged dominance explains why investors are willing to pay so much for Alphabet and other FAANGs, especially at a time when the broader economic forecast is so uncertain.

To be sure, valuations may be too high for comfort right now, especially after the FAANGs' big run-up this year. But putting a reasonable value on these businesses raises the question of how much a stable quasi-monopoly is worth in troubled economic times. Maybe more than you think. For now, the Justice Department lawsuit offers more reasons for investors to embrace Big Tech than to avoid it.

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