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 migrate their FB data to other platforms. Here again, FB collected this data over the years by offering free services. It is now monetizing this data through advertising and e-commerce.
FB’s entire revenue comes from advertising. The above suggestions could hurt its revenue. Hence, its stock went through a rollercoaster ride in October, but the overall impact was positive. The stock surged 5.3% last month and 4.4% in the first week of November. With the ease in regulatory concerns, FB can focus on its e-commerce venture to boost future growth.
FB is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, and Industry Rank, and a “B” for Buy & Hold Grade. In the Internet industry, it is ranked #5.
Alibaba Group Holding Ltd (BABA)
BABA dominates the Chinese e-commerce market. It also leads in the cloud computing space and is now expanding into internet content services. But all this dominance is in the Chinese market. For a giant like BABA, it needs to expand beyond China to sustain growth.
In September 2014, BABA launched the world’s largest IPO of $25 billion on the New York Stock Exchange (NYSE), with a stock price of $68. Since then, it has grown fourfold to $272 on the back of growth in e-commerce and other sectors. While BABA’s earnings were unaffected by the US-China trade war, it was investors’ fear that prevented the stock from rallying above $200 on the NYSE in 2018-2019.
However, the pandemic-infused e-commerce wave drove BABA’s stock up 41% year-to-date to $299. BABA’s stock dipped 8% last week even though it reported robust earnings. The stock dipped as Chinese officials and regulators suspended the $37 billion IPO of fintech company Ant Group, after Jack Ma gave a speech critical of the Chinese banking industry at a summit.
Amidst this heat, the US election outcome came as pleasant news. A gridlock Senate would ease the U.S. tariffs on China and revive US investors’ confidence in the Chinese giant. BABA should continue to ride the digitization wave and report strong growth in the future.
Hence, BABA is rated a “Strong Buy” in the POWR Ratings. It holds straight “A”s in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #1 in the 115-stocks China industry.
Note that BABA is one of 8 stocks in the Reitmeister’s Total Return portfolio. Learn more here.
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GOOGL shares were trading at $1,806.26 per share on Monday morning, up $46.53 (+2.64%). Year-to-date, GOOGL has gained 34.86%, versus a 14.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More...
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