This week, the stock exchange schedule is packed with a lot of important data. Some of them can even explain why there have been such large discounts on technology stocks recently.
CEOs have to dance in front of the congress
Well, one reason for the NASDAQ 100’s setbacks can, of course, simply be the exaggeration in tech stocks that Sven Weisenhaus clarified again on Friday. But experience has shown that investors cannot be pushed out of their investments (and dream dreams) without good reason. Even the obvious fact of an exaggeration is far from enough, as the history of the stock market has already shown several times. (Rather the opposite is the case …)
On Wednesday of this week, however, a possibly trend-setting event is pending for the Big 4 of the US technology companies: The CEOs or main owners of Alphabet (Google), Amazon, Apple and Facebook have to face a hearing of the Justice Committee of the US House of Representatives.
The Hearings by Sundar Pichai (Google), Jeff Bezos (Amazon), Tim Cook (Apple) and Mark Zuckerberg (Facebook) deal with the various antitrust allegations that the four companies are facing. It is part of a one-year investigation into the alleged anti-competitive behavior of companies in the technology sector.
Platform strategies in the twilight
The Judiciary Committee’s Subcommittee on Antitrust investigates various possible abuses by each of the four companies: Google’s monopoly control over the Internet advertising market, Amazon’s disadvantage of third-party sellers and customers on its marketplace, Apple’s restrictive store guidelines and the controversial takeover of WhatsApp by antitrust law and Instagram through Facebook.
In the overarching context, it is about the dominance of a small number of digital platforms in different markets, which displaces other providers and creates and cemented monopoly-like structures. This also raises the question of the extent to which the existing antitrust laws are still appropriate or have to be adapted to the new realities of the Internet economy or what needs to be done to adequately enforce existing or new guidelines.
The hearing and its possible consequences could have significant effects on the business models of the technology industry – and therefore also for investors. Aside from the Big 4, which this week’s specifics are about, a number of other companies are pursuing similar strategies: Uber wants to create a global platform for transportation services; other mobility service providers are planning similar things in some areas (e.g. e-scooters). Delivery Hero and Co. argue over the control of food deliveries, others – e.g. again Amazon – want to roll up the market for deliveries of food and everyday necessities.
The winner takes it all
It is not only an open secret in the industry, it has long been frankly admitted by companies and investors that these business models can only work in the end if a platform dominates the market – according to the motto: The winner takes it all! There is no room for two or even more providers because a competition would completely erode the already narrow margins of such services.
This is exactly why Facebook bought Instagram and WhatsApp at exorbitant prices. Therefore, the German Delivery Hero has sold its Germany activities (pizza.de, Foodora, Lieferheld) to the Dutch competitor JustEatTakeaway (Lieferando) – and could therefore become the first DAX group without Germany business (!) If the company soon becomes the first bankruptcy firm in the DAX Wirecard replaced. Consolidation of food delivery services is also in full swing in other markets: JustEatTakeaway recently grabbed the US provider Grub, which Uber also wanted to have and in which Delivery Hero was also interested. In South Korea, on the other hand, Delivey Hero came into play and grabbed number 2 in the market.
Mobility platforms: Big mess and pressure from virus pandemic
In contrast, the ordinary observer has long lost track of the mobility platforms. Sure, FlixBus is still the undisputed number 1 in long-distance buses (which is also thanks to its aggressive expansion and acquisition strategy), but the car sharing services of BMW (DriveNow) and Daimler (car2go) have now become ShareNow, which in turn Under the overall brand YourNow also taxi services (MyTaxi), solutions for parking problems, charging stations for electric cars and other, rather vague mobility services are combined.
And it’s not just because of the Corona crisis that things have gotten pretty quiet around the e-scooter providers. But the consolidation, which was already in full swing before, continues in the meantime – if not through “innovative” takeovers (the last one was in January, before Corona, when the US pioneer Jump took over the German Circ), but instead due to the traditional shrinking of the business: The industry has been characterized by layoffs or short-time work for months and is dependent on new investor funds or emergency financing in order to compensate for the losses, which are also increasing (also due to the crisis).
Even the FlixBus parent company has already taken out a KfW loan from the German Corona rescue program and is no longer excluding state aid. Note the irony of history: A company that has become a quasi-monopolist through aggressive expansion (and among other things has also pushed the long-distance bus provider of Deutsche Bahn – i.e. a state-owned company!) Out of the market and therefore in the crosshairs of ( state!) cartel guard stands, may want to be saved by the state …
Group splitting, the ultimate danger
So while the struggle for supremacy is still raging in several markets, the Big 4 of the US tech scene have secured their dominance for years. And it is precisely this dominance that is no longer just a thorn in the side of critics and some economists, but also of anti-trust authorities and politicians.
But every user has known for a long time that you can hardly avoid the offers of these giants – if at all, this can only be done with great effort. How critical each individual sees it, and whether you accept that with a shrug or resigned acceptance is another question. But the more such services you deliver to yourself and your data, the greater the general discomfort. And with it the political pressure to take effective action against it.
It is still unclear whether this will happen – but it is also an important question for investors. If US politics continues to follow this issue, or even intensifies it, after this week’s hearing, it could eventually take concrete action against the Big 4. That goes as far as considerations about their forced smashing, following the example of the splitting up of the US telephone giant AT&T in the 1980s.
Is the turnover big enough, will there be profits at some point ?!
For a number of companies and their investors, tough political action against platform models would be a big blow. This would make many business models in the so-called “The Winner takes all” markets obsolete, into which enormous sums are currently still being pumped. These markets promise enormous sales potential, because theoretically the upper limit is only the world (population) – after all, everyone is a potential customer for the ultimately dominant provider!
Although most companies still burn a lot of money for marketing and expansion and therefore usually write horrendous losses, they do not have to worry about new financing. Your investors firmly believe that business with such high sales will eventually be profitable. And of course everyone hopes that “their” company will be the winner who will get everything in the end. Because only then will the current investments bring the desired gigantic profits.
This calculation would of course be invalid if the authorities take it seriously and effectively limit the power of such global platform groups as Google, Amazon, Apple and Facebook, or even split them into individual parts. As a result, investors should watch the hearings on Wednesday this week closely. And the losses of the previous week could simply be due to the fact that first investors are securing their profits in view of this uncertainty and did not want to wait for Wednesday’s results.
Politicians are usually satisfied with money
But this caution may not be necessary. So far, similar hearings in which corporate bosses are “grilled” by politicians have brought little. Neither in the USA nor in Europe did Microsoft, Google or Facebook (some of which had already been the focus of the authorities several times) fear more than a hefty fine. Even if this was in the individual case several billion dollars or euros – the highly lucrative, monopoly-like business quickly recouped the money and made the supposedly high penalty seem like the famous “peanuts” afterwards.
As long as it is “only” about money, such processes are annoying for the company and investors, but they can be put up with. But even measures that go beyond this in the long term do not necessarily have to be a bitter pill for investors.
From 1998 to 2000, a similar antitrust procedure was conducted against Microsoft, which also ended with a split judgment. However, this was finally canceled. As you know, this did no harm to the course of Microsoft shares in this hot period of the technology bubble. The AT&T share also moved at least in line with the market during the antitrust proceedings against the company or until the final split.
Phoenixes from the ashes
And after the split, AT&T became a high-flyer on the stock market in the rally that started in the 1980s and was one of the strongest stocks on the US stock market during that period when it reached its all-time high in 1999. From the outsourcing of AT&T, which later also went public, Lucent Technologies (which emerged from the legendary Bell Laboratories) also proved to be a very lucrative share for investors after its launch in 1996 – at that time even taking Microsoft well could (see the following charts).
The showdown of the 4 big techs on Wednesday may have many dimensions, but it does not necessarily have to be negative for investors. On the contrary: No matter how the matter turns out (probably only in a few years) – in any case, new opportunities will also arise for investors with these companies.
So if you got off last week as a precaution, you could soon regret it. Finally, the NASDAQ 100 already hinted at a possible reversal on Friday.
Quarterly results are more important than the hearing
But the reason for the sales was possibly also different: The four companies mentioned will also present their quarterly figures this week (together with several others). And in spite of the analysts’ expectations in the current quarterly reporting season, which were in some cases far exceeded, profit-taking dominated for many stocks that were recently cheered up (e.g. at Tesla; see Börse-Intern on Friday). So maybe some investors have dried their sheep before the Big 4 are in the spotlight this week.
But other events also require market attention this week: Republicans in the U.S. Senate are expected to present their proposals to boost the economy after the additional unemployment benefit has now expired during the Corona crisis.
And then there’s the Fed …
The Fed’s FOMC meeting, July 28-29, could also impact the markets. While concrete rate decisions are not expected, this time the Fed officials have a larger agenda than usual. They will be debating what form of economic stimulus is appropriate from the fall, whether the composition of purchases of Treasury bills and mortgage bonds is different from what happened after the financial crisis Should move to longer-term securities in 2008 and how long interest rates should stay close to zero.
There is also a question of whether the Fed should officially move away from its “magic” inflation target of 2% at least temporarily. There is some support for this not only among economists, but also among the Fed members themselves. However, since the financial crisis, central banks have had little success in driving inflation up by cutting interest rates and printing money. So it remains to be seen what consequences a move away from this target would actually have in the end.
But no question: The further development of the NASDAQ 100 is likely to be more exciting than such academic discussions in the near future – in other words, how the exaggeration of tech values continues. And the Big 4 – which also have the highest weight on the stock exchange – should therefore have the biggest part in this development either way after the showdown this week.
Yours Torsten Ewert
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