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Antitrust Risk on the Rise for Facebook and Alphabet

Fines and new regulations are likely for both firms, but the political upheaval in an election year puts Facebook more in peril.

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Ali Mogharabi: We believe Alphabet and Facebook stocks are fairly valued, but the latest antitrust movement in the United States creates more risk for both. Possible actions to be taken by politicians and lawmakers include more fines, regulations, and breakups due to what may be considered as previous antitrust acquisitions. We believe the most likely one would be a combination of fines and regulations imposed on the firms.

With the upcoming 2020 elections, politicians, federal agencies, and international lawmakers are proposing more stringent enforcement of antitrust laws on Facebook, Google, and big techs.

The dominance by those companies in markets such as online advertising and social network has outraged politicians. And that's one of the reasons that they'll be pushing for more law changes or reinterpretation of the existing ones. New regulations will be focusing more on data privacy and security. And those laws are proposed at the state and federal levels. Plus, big fines along with new investigations continue to be thrown at Google and Facebook by the FTC and the DOJ.

We also think the makeup of the Supreme Court and possible changes in justices will impact antitrust law interpretations.

The consumer welfare approach to those antitrust laws that's been effective for over 40 years, and precedents like the decision in the 2018 Ohio v. American Express case, may help the Google and Facebook cases. But other cases, like the Microsoft settlement, do not look favorable.

Again, the likeliest outcome for both Alphabet and Facebook is that they'll be fined and more regulations will be passed and enforced on the two.

Impact of those on the companies' operations include more slowdown in revenue growth, given that the more aggressive enforcement of the antitrust Clayton Act may limit acquisitions.

Also, there will be margin pressure given the additional costs associated with more regulations and the necessity to invest even more in terms of R&D.

And lastly, we do think there is more uncertainty and risks for Facebook than for Google, as Facebook is caught more in the political upheaval this election year.

Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.