Regulation is the biggest risk for Facebook and Google but chief executives would be better to accept the reality of this rather than fight against it.
Speaking at the Morningstar Investment Conference, Mark Casey, portfolio manager at Capital Group, said the threat of regulation was the reason for the lower valuation of Facebook.
Shares in Facebook had risen 25% since the start of the year but this was less than the other FAANG stocks such as Netflix and Amazon which had both risen over 60% during the same period.
“Regulation is the biggest risk for Facebook and Google, less so for Amazon. Every company that has a similar growth profile as Facebook is trading higher than Facebook and the reason for that is everyone is worried about the regulatory risk.”
There were almost 60 funds in the Australian Core Strategies universe which held Facebook in its portfolio including Antipodes Global, Ironbark Copper Rock Global All Cap Share, Magellan Global and Platinum Global.
He said it would be in the favour of technology companies’ to agree and comply with the regulation rather than fight against it as this would allow them to focus on other opportunities.
“When you look at AT&T, Microsoft and IBM, these were three companies who were caught up in anti-trust battles, and what you notice is they should have just listened to the government and done what they said. The companies that listened and didn’t fight against it are the ones who have been quicker to explore software as a service (Saas) which has been a real driver,” Casey said.
“People like [Google CEO] Larry Page, Jeff Bezos and Mark Zuckerberg are embracing reality and they won’t get into a big argument over that.
“With regulations such as [data privacy law] GDPR data in Europe, complying with those regulations tends to be expensive and Facebook has the resources to do so. That regulation also reduces the risk that a start-up will emerge.”
