Google anti-trust implications for mega Tech and EMs in its shadow
Strategy Note / United States of America

Google anti-trust implications for mega Tech and EMs in its shadow

  • Anti-trust regulation adds to other Tech risks (nationalist regulation, China-Taiwan friction, much dearer valuation)
  • No other sector matches secular growth of mega Tech, but old-fashioned growth in EM may regain some its relative appeal
  • Google US anti-trust action re-runs 1998 suit against Microsoft and may presage more against mega US Tech

The Google anti-trust lawsuit in the US looks very similar to the one launched in 1998 against Microsoft although a guilty verdict is unlikely to crash Technology valuations in the manner of the dot-com bubble burst in 2000.

Nevertheless, greater anti-trust regulatory scrutiny for mega Technology adds to other worsening risk factors this year: nationalist regulation, China-Taiwan territorial friction, and much dearer valuation multiples.

Investors continue to look through these risks and reward mega Technology's superior growth and returns on capital, in comparison with every other sector (a gap widened by Covid-19).

If this lawsuit tips some to worry more about the risks in mega Tech, which have also deteriorated in 2020, then it may create some space for some of the old-fashioned growth available in pockets of EM and FM.

Note that the initiation of anti-trust proceedings against Google follows the recent 450-page report from a US Congressional committee (led by the Democrats), in which Google, Apple, Amazon, and Facebook were alleged to be undermining commercial and political freedom. Technology anti-trust action was one of President Trump’s 2016 election pledges. This suggests that this lawsuit is grounded in a bipartisan consensus and is likely the first of more.

Google anti-trust mirrors Microsoft 1998, but this tech boom not like dotcom bubble

For years, mega Technology companies have grown faster and with higher returns on capital (particularly, in US$ terms), enjoyed wider equity valuation multiple expansion, and attracted greater fund inflows (the amplifying effect of passively managed assets) than old-fashioned sectors in DM, EM, or FM. In many respects, every other part of the public equity universe has lived in the shadow of mega Tech, even within EM-FM with the outperformance of China (mainly software applications), Korea-Taiwan (mainly hardware manufacturers) and small EM-FM Tech (eg Mercado Libre, Sea, Yandex).

The US Department of Justice filed an anti-trust lawsuit against Google's online search on 20 October. In some respects, this is quite a narrowly defined case and is very similar to the case against Microsoft's web browser (Microsoft’s version of the software which ultimately grew into the Google commercial juggernaut of online search, as we know it today). This is not a coincidence. The DoJ expects their chances of success are maximised by mirroring a precedent lawsuit. But the repercussions, whether the prosecution succeeds or not, are much wider because they could presage anti-trust suits against the other titans of US mega Technology, eg Amazon, Apple, and Facebook.

The Google lawsuit may evoke memories of April 2000, when Microsoft's guilty verdict in its US anti-trust case, launched a couple of years earlier, finally burst the dot-com equity bubble. That is likely far too dramatic; at that time, US interest rates were on a hiking cycle (as opposed to the stimulatory environment today and the foreseeable future), many of the most fancied internet companies had no path to profitability (unlike the formidable returns on capital and profit profile of today's Tech titans), and there was no exogenous event like Covid-19 to accelerate Tech adoption (and widen the gap in Tech growth and access to capital relative to all other sectors which have been negatively impacted by Covid-19).

Covid-19 boon for Tech (in DM, EM, FM) in 2020, but risk factors have also worsened

Nevertheless, if the Google anti-trust lawsuit crystallises the start of an era of much tougher US anti-trust scrutiny (likely emboldening regulators elsewhere) then this adds to other risk factors for mega Tech, which have deteriorated this year:

  • The nationalist regulatory agenda (tighter restrictions on US-listed Chinese Tech companies; creeping scrutiny of US institutional investment in onshore Chinese listed securities; "splinternet" for Tech applications, eg Tencent-affiliated company restrictions in the US; blocking off markets for hardware, eg Huawei mobile network equipment; restricted access for foundational hardware components, eg ARM chip designs; potential duplication of hardware supply chains, eg TSMC foundries or Hon Hai-Foxconn assembly plants);

  • Intensifying territorial friction between China and Taiwan (Province of China) and others around the 10-Dash line, which may spillover into operational risks for the Taiwan Tech hardware sector (which, in turn, is central to the global hardware sector); and

  • Valuation multiples have become much dearer (ie the entry-price to access albeit superior growth has also cranked up) — forward P/E for the FANG+, China Consumer Discretionary (mainly Tech apps), EM Tech Hardware (mainly Korea-Taiwan Tech) are, respectively, 45%, 67%, 26%, higher (despite the September 2020 sell-off) than at the end of January 2020 and trailing EV/Sales for Mercado Libre and Sea are, respectively, 61%, 200%, 53%, higher on the same timeframe.

Related reading

'Splinternet' problems for EM equity investors (August 2020)

US weaponises all Tech regulation in China friction, EM Tech in the cross hairs (August 2020)

Technology stocks cheaper in Taiwan-Korea vs US or China, let alone small EM-FM (September 2020)

Chasing technology's tail: EM equity strategy overview (June 2020)

Disruptive Technology and low FX controls risk in small EM via overseas listings (April 2020)


Most Viewed See all latest
Disclosures

This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

Full Tellimer disclaimers