2020 was a splendid year for the four of the biggest US technology companies Amazon, Apple, Facebook and Google parent Alphabet.
These market leaders thrived during a year when the global pandemic put many firms out of business, raking in profits that sent their stock prices soaring and leaving them more influential and valuable than ever. But the outlook for next year is a different story.
Keeping up the success streak
From mounting antitrust and regulatory issues to high valuations and a turbulent economy, these formidable giants face challenges on many fronts, all of which threaten to ruin the prospects for a repeat performance in 2021. And not just next year, the increasing concern of governments over the market influence of these companies will force changes to their businesses with much longer-lasting consequences.
First, the numbers. As the foursome greet 2021, they will have a much higher bar to meet to impress investors after their big stock rallies this year. Amazon shares are trading at a forward sales multiple about 30 percent higher than the five-year average, which could quickly lead to disappointment if its eCommerce or cloud-computing businesses slow.
Apple’s latest line-up of iPhones needs to materially exceed sales expectations to justify a price-to-earnings ratio valuation roughly double its past history. As for Facebook and Alphabet, their valuations are now baking in a robust digital-advertising recovery for next year that is by no means assured.
And if TikTok can get past the US government’s attempts to ban its app, the social media firm can be a more formidable rival for corporate ad budgets in 2021 with its large user base.
A large part of the industry’s rally this year came from the so-called safety premium trade, in which portfolio managers shifted funds into technology stocks to avoid the solvency risks found in other traditional sectors such as travel, energy and retail.
Any gains from this allocation shift may quickly dissipate should the economy, once stabilized, start to improve rapidly which is a scenario many fund managers expect for the second half of 2021 as vaccines become widely available. Inflows may become outflows if investors decide to buy back into beaten-down economically sensitive stocks with their cheaper valuations.
Regulations that can hold them down
The biggest threat, though, is more existential. After years of successfully skirting the type of regulatory scrutiny that market rivals, watchdogs and politicians have long said they deserved, the foursome are now the target of governments around the world that say their market dominance hampers competition and harms consumers.
In Europe, government officials are debating the introduction of new laws banning firms from using their platforms’ influence to favor their own products. It would hurt profitable business lines, including Amazon’s private label products, Apple’s Music service and Google’s practice of rating its offerings higher in search results, if the legislation, which seems to have strong political support, becomes law.
The US is also considering reforms that can significantly curb the industry’s ability to stifle competition by buying emerging startups. For Google and Facebook, there is also the overhang of serious antitrust lawsuits brought by the US Department of Justice, state attorneys general and, in Facebook’s case, the Federal Trade Commission, too.
In the case against Google, government prosecutors want to halt the internet giant’s use of paid exclusionary distribution agreements to make its search engine the default option on mobile devices. They also want Google to provide search results based purely on relevance and not internal business objectives.
The lawsuit against Facebook says the company is so dominant in social media it may need to be broken up. While the court battles may take years to fully resolve, any sudden developments could hurt investor sentiment.
In some ways, the fact that Amazon, Apple, Facebook and Google had such a remarkably successful year may prove to be a liability. Governments can clearly see the extent of each company’s market dominance after such impressive financial showings and investors, too, now have embedded much higher expectations. That’s a recipe for a let-down.
