We highlighted the launch of the ICE FANG futures contract earlier this week (here) and what an auspicious moment it was for the launch.

The argument put forward by Kevin Muir via The Macro Tourist blog, was that it is possible to be “bearish on the FANG stocks, but not be some perma-bear who thinks the world is about to collapse”. As Muir explained.

The reality of today’s limited alpha market is that when an investing theme gets some legs, it often becomes overdone and prone to disappointment. I have written about how, all too often, this results in a series of rolling mini-bubbles. There is nothing wrong with observing that the new era tech stocks are stupidly overbought, and that the risks are to the downside in the coming months. You can be bearish on FANG without thinking all stocks are going to zero…This new FANG contract offers some great opportunities to short the speculative names that have been the source of such over-exuberance, while maybe hedging it with a long position in the S&P 500 futures contract.

Muir commented wryly that now he would be able to get in as much trouble as high-profile bear David Einhorn of Greenlight Capital by buying “old economy stocks and shorting the new tech darlings.” Another investor, with more than one gray hair of experience, has penned a thoughtful bearish piece on the FANGs in recent days, this time Neil Dwayne of Allianz Global Investors. Dwane’s piece is titled “De-FANGed: 5 Ways the Disrupters Could be Disrupted.” Dwane begins by noting that while consumers love the services they provide, the regulators are taking an increasingly close look at their anti-competitive practices.

Just as the growth, earnings and cash generation of these Big Tech names have soared, so has their impact on economies and consumers, who are wowed by the services, price transparency and convenience they provide. As a result, there has until recently been little public pressure to challenge the dominance of these firms, which some critics liken to near-monopoly status. Yet these powerful companies are attracting greater scrutiny from regulators:

• In June 2017, European Union antitrust regulators fined Google EUR 2.4 billion for unfairly manipulating search results to benefit its own shopping platform.
• In October 2017, the European Commission levied a EUR 250 million fine against Amazon for receiving illegal state aid from Luxembourg.
• As the US government probes Russia’s alleged influence on US elections, it is asking hard questions about Facebook and Google’s roles in selling advertising and allowing “fake news” to proliferate.
• In May 2018, the European Union will implement a robust set of requirements – the General Data Protection Regulation (GDPR) – aimed at guarding personal information and reshaping how organizations approach data privacy. This will affect not only the FANG stocks, but any company with a digital presence in the EU.

Pointing out that government regulators appear to be increasingly focused on reining back the dominance of these companies, Dwane asks whether these “masters of high-tech disruption” are about to find themselves disrupted. Dwane finds that it may not only be regulators which could reverse the seemingly never-ending rise in market capitalization of these stocks. He outlines five ways in which the disrupters could be disrupted, beginning with the critical, for some of these companies, and potentially vulnerable issue of online advertising.

1. Digital advertising comes under pressure

“Bots” and automatic algorithms have completely transformed the realm of digital advertising and brought in billions of dollars in revenue for Facebook and Google. Yet an old adage still rings true today – “half the money I spend on advertising is wasted; the trouble is, I don't know which half”. If doubts about ad-sales effectiveness and practices grow, they could undermine social media business models and the profitability of the FANGs.

• Some firms may be overstating the reach and effectiveness of their technologies. One mega-cap US consumer-goods company recently made headlines when it slashed its online ad spending, citing “largely ineffective” digital ads.
• On the other hand, some of these ad-sales platforms may work too well, bringing into question the professed “platform neutrality” of some Big Tech companies. Amid growing concerns about Russia’s role in recent US elections, Facebook recently bought its own high-profile ads to detail how it is “protecting our community from election interference” – a clear response to calls for them to police their network.

2. “Free” content dilutes brand loyalty and bottom lines
Even though social media has become part of our daily lives, how much brand loyalty does it inspire? Surveys show that use of social media would drop if consumers had to pay for access – or they would migrate to other “free” services. This has implications for corporate longevity. Some may not endure in the same way as companies in more traditional industries once did with similar size and scale.

For its part, Google has recently announced it is dumping its “first-click-free” news policy, which had forced media companies to offer some free content or see their search-engine rankings plummet. This can be seen as a way of helping to support digital subscriptions – and therefore funding – for news providers. Google may also hope this heads off more onerous regulations by positioning them as good corporate citizens, and by reinforcing their stance that they are not a media company.

3. Unused cash grows costly
The FANGs remain extremely profitable, yet much of the cash they generate languishes on balance sheets. The result is billions of dollars left unused, un-returned to shareholders and unable to boost economic growth – and in many cases untaxed as well. This is growing increasingly frustrating for almost everyone but the cash-rich companies themselves. Unfortunately, there may not be much shareholders can do about it – the “founder’s stock” structure used at some firms does not always create an environment of good corporate governance – though active investors can try to effect change. Regulators have more power, however, and they are clearly looking for ways to claw back some of this cash.

4. Regulators crack down on data privacy
Big data, predictive algorithms and artificial intelligence all rely on one thing: collecting and analysing information. However, when the data in question come from the lives and habits of private citizens, shouldn’t they be able to influence how the data are used? Regulators in Europe agree. The EU’s new GDPR will give citizens more insight into and control of their digital information – and it will give regulators a potent new weapon against companies that don’t act in consumers’ best interest. While rules that are overly stringent could limit the benefits of technological innovations, the GDPR could also increase consumers’ trust in digital services and create a level playing field for companies that responsibly monetize consumers’ data.

5. Political pressure leads to new “duty of care” requirement
As a global producer of content that leverages it against advertising to drive growth, Facebook has effectively become a media company – yet critics suggest that it seeks to leverage its success as a global influencer without the responsibility that comes with it. This privilege may disappear if the US government imposes on Facebook and other social media platforms the kind of “duty of care” requirement that many old-world media companies have been facing for many years. This would force some Big Tech firms to engage in the kind of onerous editorial and legal responsibilities that already impair their current competitors – ironically disrupting their own disruption and potentially adding to their cost bases.

Dwane’s conclusion, which we lay out below, is that the growing regulation of these companies alone will bring their heyday – in stock market terms anyway – to an end. In contrast, he sees a better outlook for China’s version of the FANGs…the BATs (Baidu, Alibaba and Tencent).

Western governments have for the most part been happy to let Silicon Valley oversee itself, but it is clear that this grace period may be closing – especially in Europe. In addition to some of the new rules and pressures outlined above, we expect the playing field to be levelled further:

• The EU has launched a growing assault against US tech companies to ensure they pay their fair share of tax to society; it will soon announce a new plan that addresses cross-border sales tax rules.
• The US government has room to manoeuvre. Historically, concentrated power similar to that wielded by today’s Big Tech firms has led to government intervention – witness the breakup of the US telecom monopoly in the 1980s or US government actions against Microsoft in the 1990s.
• As the US Congress continues to probe Facebook and Google’s role in allegedly helping Russia influence US elections, it could fuel a growing backlash about issues ranging from political advertising to online privacy.

It is growing increasingly possible that these regulatory pressures could soon begin to limit the almighty FANGs’ reach in the US and Europe – rich but small markets compared with the opportunities facing China’s BATs (Baidu, Alibaba and Tencent). These firms are in many ways the Chinese equivalents of the FANGs, yet as of now, the BATs aren’t facing the same level of increasing regulatory scrutiny as their FANG counterparts. With less-onerous oversight and a larger opportunity set in their own neighbourhoods – populations in Asia are exponentially bigger – one could make the case that the BATs may fly further than the FANGs.

Whether Dwane’s arguments will prove to be just another premature obituary in the performance of the awesome FANGs, time will tell. Left to their own devices, there seems to be no stopping them. The things is, there’s something that governments value above all else, control. Perhaps the real question is just how close to the deep state (s) are some of these companies already? For now, however, any dips in these stocks are reversing quickly…as we saw again yesterday.