The Big Tech companies, from Facebook to Uber, have valuations equivalent to the economies of small countries not just because antiquated antitrust rules allow them to dominate their industrial sectors, but because they are lightly regulated and find clever ways to avoid taxes.
But what if the conditions that allowed them to supersize themselves, creating fortunes for investors as valuations doubled, then doubled again, were to change? The mere threat of tighter regulation, updated antitrust legislation and revenue taxes could send valuations tumbling. That process might already be under way.
On Monday, Facebook shares took their worst fall in more than five years as the company's alleged role in the Cambridge Analytics data harvesting scandal triggered a global backlash.
The shares dropped almost 7 per cent, wiping US$35-billlion off its valuation. On Tuesday, as more revelations about Facebook's evidently lax approach to data protection filled the headlines, the shares took another tumble – they were down about 2.5 per cent in Tuesday trading. Facebook founder Mark Zuckerberg has had better days; traders are joking that his chances of running for president in 2020 have dropped to zero.
The Great Tech Rollover may be under way and could prove infectious. Facebook investors are obviously worried that regulators will clamp down on the company. Already, investigations into the alleged misuse of Facebook user data has triggered a flurry of investigations. Among the curious, and possibly furious, are Britain's data protection authority, the Massachusetts attorney-general and the U.S Federal Trade Commission.
In reality, the tech sector has seen better days, even if is premature to say that the touted "tech bubble" is set to burst – bubbles are never proven bubbles until they do. Shares of Snap (formerly Snapchat) are down 18 per cent in the last year, taking them below their US$17 initial public offering price. Dropbox, an online file-storage company, is heading to the stock market with a valuation almost 30 per cent below its peak. Softbank made an investment in Uber in late 2017 that valued the ride-hailing company at about US$48-billon, well short of the US$68-billion valuation implied in the previous private funding round. Its valuation won't be helped by the accident in Arizona on Sunday, when an Uber self-driving car killed a pedestrian. Uber's growth plan rests in good part on self-driving technology.
And then there is Bitcoin, perhaps the ultimate tech play. According to coinmarketcap.com, the cryptocurrency is worth about US$8,500. In December, it had hit US$20,000. The other top cryptocurrencies – Ethereum, Ripple, Bitcoin Cash, Litecoin – are getting their lights punched out too.
The so called FAANG stocks – Facebook, Amazon, Apple, Netflix, Google (owned by Alphabet) – might be next, as the tech selling pressure moves to the biggies.
To be sure, selloff panic has not set in yet, even if Facebook is taking a beating. Credit goes to Donald Trump. He's lowering corporate taxes. Crucially for investors, the new tax law will allow American companies to repatriate cash sitting in foreign bank accounts at a vastly reduced rate, possibly as low as 8 per cent compared with the normal 35-per-cent repatriation hit.
Apple alone has more than US$250-billion parked overseas; collectively, American companies have some US$2.6-trillion in offshore accounts. When this loot comes roaring back, as it will, a lot of it will be used to fund tech share buybacks, propping up share prices. That's what happened in the last big repatriation.
Still, the potential forces working in the opposite direction cannot be discounted and are potentially fearsome.
For years, consumer groups and privacy advocates have been putting pressure on legislators to hit Facebook with tough regulations. The calls intensified when Russia allegedly used Facebook to influence American voters in the 2016 election. On Sunday, when news broke that Cambridge Analytica was given access to vast amounts of Facebook data and may not have deleted it, Democratic U.S. Senator Amy Klobuchar declared on Twitter that "It's clear these platforms can't police themselves."
At the same time, the tech biggies are getting so big that antitrust laws might have to be changed to rein them in. Google has almost 90 per cent of the market for search advertising; Facebook (including Instagram, Messenger and WhatsApp) controls more than 70 per cent of media traffic on mobile devices; Amazon has 70 per cent of the e-book market. The concentration of corporate power in the tech world is becoming formidable and scary. Who is going to launch a competitor to Facebook or Google? No one, is the answer. Consumer welfare demands a fresh look at antitrust laws.
Another threat to Big Tech is taxation. The European Union is planning to slap a revenue tax on top digital companies such as Twitter and Alphabet, some of which are expert at exploiting tax loopholes in various EU countries. A draft proposal would see the tax set at 3 per cent of gross revenues. While that's not a lot, it might be enough to spook investors. It could also lead to other taxes. How about a tax on personal data transfers?
The Facebook pounding is adding to jitters across the tech sector. This could get ugly for investors.