The U.S. government is trying to crack down on Big Tech, claiming a handful of our mega-cap names are using their size and market influence to hurt competition. Still, we remain bullish. In our view, the companies in the regulators’ sights — Alphabet ‘s (GOOGL) Google, Amazon (AMZN) and Microsoft (MSFT) — are not engaged in anti-competitive behavior. While they also have solid long-term fundamentals and bright growth prospects, we will be watching for headline risk to their stocks as each company battles the government and sometimes with each other. Case in point, Satya Nadella — CEO of Microsoft, which faces its own regulatory challenges — testified Monday in Google’s ongoing federal antitrust trial over search. On the stand, Nadella called Google’s argument that it’s easy to change the search defaults on smartphones “bogus.” Microsoft’s Bing competes as a distant second in the search business. GOOGL YTD mountain Alphabet YTD At the heart of the current Google trial in Washington D.C., are DOJ claims that the tech giant unfairly used exclusive deals with mobile companies and browser firms to make its search engine the default for consumers. The proceedings stem from a Justice Department lawsuit filed in October 2020 in the U.S. District Court for the District of Columbia. A DOJ win here could mean changes in how Google goes about locking down search defaults. In January, the DOJ filed a second, separate antitrust lawsuit against Alphabet in the U.S. District Court for the Eastern District of Virginia. This case, which alleges monopolistic behavior in Google’s advertising technology business, is more concerning to us as Alphabet investors. If the government were to win this one, Google would likely be forced to split off its key ad tech assets. The bulk of Google’s revenue comes from advertising — so any threat from the Washington case or the Virginia case to its search businesses or ad-tech businesses could pose headwinds. However, we think Alphabet can go higher because even if the DOJ were to prevent the search engine deals because the product is so entrenched in everyone’s daily lives. Even if Google was not the default search on smartphones, it would still be the preferred search engine of choice by users and we think it is unlikely that it will lose material market share. Alphabet has denied the allegations in both DOJ lawsuits. “I understand [regulators’] impulse to look at these multi-trillion dollar companies,” CNBC’s Jim Cramer said on “Mad Money” last week. “But they got that big because they’re so much better than the competition. No amount of regulatory action can roll that back.” Year to date, Alphabet has gained more than 50%, outperforming the tech-heavy Nasdaq’s 26% gain since the start of 2023. The Club has a 2 rating on GOOGL, which means we would wait for a pullback before buying more, and a $140-per-share price target. Back to Microsoft, its most recent clash with the government is over the software and cloud juggernaut’s proposed $68.7 billion acquisition of video game publisher Activision Blizzard (ATVI). The deal has been an uphill battle with regulators in the U.S. and overseas ever since it was first announced in January 2022. The Federal Trade Commission tried to block the deal with an antitrust lawsuit in December 2022, claiming approval would “likely result in significant harm to consumers in multiple markets at a pivotal time for the industry.” Microsoft makes one of the leading video counsels and platforms, Xbox, and also has video game titles, including the popular Halo franchise. These FTC efforts, however, have ultimately been mostly futile, with a federal judge recently ruling in favor of the Microsoft-Activision deal in July. MSFT YTD mountain Microsoft YTD U.K. regulators have also hounded the Big Tech name, aiming to block Microsoft’s acquisition of Activision over cloud gaming concerns. The company submitted a new deal back in August to appease regulators, agreeing to transfer cloud gaming rights to France’s Ubisoft for current and new Activision games. Last week, Microsoft was given preliminary approval by the U.K.’s Competition and Markets Authority to proceed with the deal. Still, Microsoft’s video game business is not why we like the stock so much. The main reason comes down to the opportunities in cloud and artificial intelligence . Microsoft has poured billions into OpenAI , the creator of ChatGPT, and previously built a supercomputer hosted on its Azure cloud platform. The company next month is set to launch Microsoft 365 Copilot , an AI-integrated tool with a monthly subscription service for productivity apps such as Word. Copilot will bring in another recurring revenue stream for the tech giant. Microsoft has gained more than 30% year-to-date, trading around $320 apiece Monday. The Club maintains a $400-per-share target and a 1 rating on the stock, meaning we’re open to adding to our position at these price levels. An added benefit: The likely approval of the Microsoft-Activision deal could be a bright spot for lagging mergers and acquisitions activity, giving companies that have pulled back on deal-making further regulatory clarity. This could also boost investment banking services from our financials, like Morgan Stanley (MS), a shrinking but crucial part of the bank’s business. In a showdown years in the making, the FTC last month filed a highly-anticipated antitrust lawsuit against e-commerce giant Amazon. The Federal Trade Commission under President Joe Biden is led by Lina Khan, who has been a long-time critic of Amazon. While in law school back in 2017, Khan wrote a paper called “Amazon’s Antitrust Paradox” that appeared in the Yale Law Journal. It basically said Amazon should not be exempt from antitrust scrutiny just because its customers are happy. “Khan had it out for Amazon for her whole career,” Jim added in response to FTC allegations that Amazon wields “monopoly power” to inflate prices. “This was an etched-in-stone view she had.” AMZN YTD mountain Amazon YTD The core of the FTC’s complaint alleges Amazon’s retail business engages in pricing practices that preclude merchants from lowering prices on other platforms and coerces merchants to use the company’s fulfillment services for products under the Amazon Prime listing. Amazon issued a response to the lawsuit defending its partnership with sellers and said it’s proud to bring low prices to customers. For now, we don’t see the lawsuit as a concern and continue to believe Amazon’s business fundamentals remain strong. Just like in the Google cases, there may be some headline risk to Amazon’s stock as regulatory scrutiny could be a drawn-out overhang. Remember, Microsoft battled the government for years in the late 1990s and early 2000s. So, as long-term investors in Amazon, we will be paying close attention to developments in the FTC’s case. “If you didn’t know any better, you’d think it’s one gigantic comic opera,” Jim said, in reference to the FTC lawsuit last week, describing Amazon as the “greatest bargain creator of all time.” (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, MSFT, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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The U.S. government is trying to crack down on Big Tech, claiming a handful of our mega-cap names are using their size and market influence to hurt competition.
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