Last week, the stock market rallied as the 2020 election results rolled in. The Nasdaq Composite Index surged 8.6%. Donald Trump and Joe Biden were in close competition on electoral votes. Over the weekend, Joe Biden dethroned Donald Trump in the race for the next U.S. President. However, Biden’s win doesn’t guarantee him a blank check to implement his policies as it appears Republicans will remain in control of the Senate.
Before the election, State Street Global Advisors Chief Investment Strategist Michael Arone stated that the stock market would rally irrespective of the election results on the back of low-interest rates and fiscal and monetary policy. While he is right so far, three tech stocks — Alphabet Inc. (GOOGL), Facebook (FB), and Alibaba Group Holding Ltd (BABA) — will benefit from a split Congress. These stocks soared 9%, 11.5%, and 5%, respectively, on the expectation of congressional gridlock.
How will a split Congress benefit tech stocks?
In October, GOOGL and FB came under fire when the Justice Department launched an antitrust lawsuit. The big four tech giants, including Apple (AAPL) and Amazon (AMZN), have digital monopolies in their respective fields. GOOGL controls the search and advertising space, and FB controls the social networking space.
The subcommittee report made several suggestions to address the anti-competitive practices of the four tech giants. Some of these suggestions were:
- To strengthen antitrust laws such as banning digital monopolies from using below-cost pricing to drive competition out of the market.
- To give regulators more power over big tech mergers and acquisitions (M&As).
- To break up some of the big tech companies into segments that would encourage competition.
These suggestions, if implemented, could take a long time and significantly deleverage the tech giants’ power of data and efficiency. While US tech giants faced an antitrust threat, BABA was negatively impacted by the US-China trade war.
The three companies came under the scrutiny of Democrats and Republicans ahead of the election. But the divided control of the Senate could make it difficult to pass US antitrust laws that are targeted towards internet giants. According to a Bloomberg report, Synovus Trust Company Senior Portfolio Manager Dan Morgan, in an email, wrote, “A Democrat-controlled Senate would be more likely to create overhaul and fine on Tech giants. Whereby, a Republican-controlled Senate (which seems to be most likely) would have a more laissez-faire stance.”
Morgan also stated, “A massive capital gains increase is not going to get through a Republican-controlled Senate.” This will bring significant tax savings for tech investors who have generated huge profits on the tech stock rally over the last few years. Moreover, gridlock could ease global trade tensions, especially with China.
Internet stocks and Chinese stocks could rally significantly this week on the back of a favorable election outcome.
Alphabet Inc. (GOOGL)
GOOGL rules the online search and advertising space. Before the elections, both Democrats and Republicans argued that GOOGL has way too much control over the way people shop, search, and consume information. The Justice Department filed a monopoly-abuse suit against GOOGL last month to stop its “anticompetitive and exclusionary practices.”
The department noted that GOOGL favors its products by giving them higher ranking over third-party content. It also wades out the competition by acquiring potential competitors like Android. The department suggested banning product favoring and the acquisition of tech startups to create an even playing field. It also suggested breaking up GOOGL. If GOOGL was to be broken up, it’s Android OS and Search were more likely to be split.
GOOGL has built its search monopoly by collecting a large amount of data from users and feeding it into its algorithm to create more behavioral data. The Justice Department suggested interoperability, wherein GOOGL would be required to interconnect with other networks to ensure the same services are available across firms.
GOOGL collected this data by offering free products to consumers. It earns 84% of its revenue from advertising. Any of the above suggestions would reduce its advertising revenue and hurt consumers who are getting free or low-cost products.
These antitrust threats had little impact on the stock, with GOOGL gaining 8.6% last month. However, the election results reduced the antitrust threat, relieving investors and pushing the stock up 8.9% in the first week of November. The search engine giant should continue to grow in this age of digitization.
How does GOOGL stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Industry Rank
A for Peer Grade
A for overall POWR Rating
You can’t ask for better. The stock is also ranked #2 stock in the 58-stock Internet industry.
Like GOOGL, FB also uses its monopoly in social networking, messaging, and user data to dictate the terms of advertising. It favors its products and content over third-party content. Also, it acquired its potential competitors WhatsApp and Instagram. It even acquired many startups so no new company could come close to challenging its dominance.
The Justice Department suggested interoperability as well as data portability, wherein users can…
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