FAANGS in the Diapers

Big tech is getting hit globally...

Written by Jimmy Mengel
Posted August 13, 2020

What does Big Tech have in common with diapers?

(drumroll, please...)

They’re all over your ass and they’re completely full of shit.

(rimshot)

Apologies for that terrible old joke. It used to start with “politicians”, but in the case of the antitrust investigations into America's biggest tech companies, it fits together all too well.

Earlier this month we witnessed the CEOs of Google, Facebook, Amazon, and Apple pulled in front of Congress to testify. That included two of the world's richest men in Facebook's Mark Zuckerberg and Amazon's Jeff Bezos, who was making his long-awaited congressional debut.

I personally was waiting with bated breath to see that shiny bald head under the bright lights of justice...

These very rich and powerful men were essentially there to prove that their behemoth companies weren't monopolies.

It's rather difficult to argue against it, since so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) make up almost 20% of the S&P. I assume they added Netflix because the acronym would have been in serious trouble without including it...

These companies combine for over $5 trillion in market cap. If you include Microsoft, the top five companies by market cap are big tech companies:

Apple - $1.973T

Amazon - $1.606T

Microsoft - $1.598T

Alphabet (Google) - $1.042T

Facebook - $748.921B

That's a heck of a lot of money, and you don't corner your markets by playing nice...

I'll quickly start with something boring and then get back into diapers. Monopolies have always been an issue in America. We've perfected the robber baron: Carnegie, Rockefeller, Ford, Vanderbilt. 

But the Clayton Act of 1914 explicitly prohibited corporate acquisitions if “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Woodrow Wilson signed it into law on Oct. 15, 1914. That was quite a long time ago.

Let's dive right back into the shit.

Jeff Bezos made one of many ruthless moves that violated this law. For one, he decided to corner the diaper market. To anyone who has changed their share of diapers, this doesn’t sound like a sexy business move, however, it paid off and it wasn't lost in the hearing.

Bezos received a tongue-lashing from Congresswoman Mary Gay Scanlon (D-PA) about Amazon’s business practice of eliminating its competitors. Scanlon used the diaper debacle as a case study. Amazon bought Diapers.com’s parent company Quidsi for approximately $500 million in 2010 before shutting it down in 2017.

But before Amazon acquired Diapers.com, it intentionally cut prices on Amazon’s diaper products, losing $200 million in one month alone, so it could drive Diapers.com's prices down and put it out of business.

“How much was Amazon willing to lose to undermine Diapers.com?” Scanlon asked.

“I don’t know the direct answer to your question. This is going back in time 10 or 11 years or so,” Bezos commented. “The idea of using diapers and products like that to attract new customers who have new families is a very traditional idea.”

Bullshit...

Bezos has famously instructed Amazon employees to approach discussions with business partners the “way a cheetah would pursue a sickly gazelle.”

Representative David N. Cicilline concluded by saying, “This hearing has made one fact clear to me — these companies as they exist today have monopoly power. Some need to be broken up; all need to be properly regulated and held accountable. We need to ensure the antitrust laws first written more than a century ago work in the digital age.”

Facebook and Google have made countless similar moves to corner their own markets. But I seriously doubt that the politicians will do anything other than lip service when it comes to breaking these companies up. Democrats certainly won't, as tech companies have slathered them in campaign funds.

  • Alphabet (Google) has given Democrats $5,437,048 and Republicans $766,920
  • Microsoft has given Democrats $3,969,072 and Republicans $690,953 

  • Netflix has given Democrats $340,485 and Republicans $7,124

I think you can see where this is going: Big Tech is betting big on a Biden campaign and if he wins this year, he'll certainly owe them one.

Perhaps this is part of the reason that the hearing was quickly wiped off the front page by another group of tech stocks that most Americans have never heard of...

Donald Trump made waves with two sweeping executive orders, which declared that two mobile apps posed a threat to the “national security, foreign policy, and economy of the United States."

He was talking about the short-form video app TikTok and the popular messaging service WeChat. In a very serious tone, he pledged to ban “any transaction,” by “any person…subject to the jurisdiction of the United States."

Trump even made the unprecedented announcement that someone (ahem, Microsoft) had to buy the company by September 15 AND give the Treasury a "substantial amount of money" or else.

That's basically a bribe with no basis in antitrust law.

Now, Trump has been promising to take down TikTok — the wildly popular video-sharing site run by Chinese company Bytedance — for some time now. I suspect the fear is that aside from the quite serious security concerns, TikTok is full of videos mocking the President outright.

One thing Trump doesn't suffer gladly is being insulted...

But aside from the TikTok situation, his other major tech announcement — and one I found far more impactful — was Trump's executive order to ban Tencent (OTC: TCEHY) from operating in the U.S. If you aren't familiar with Tencent, you aren't alone — it isn't a household brand like Facebook.

However earlier this year, the Shenzhen company actually overtook Facebook by market cap.

Tencent is the world's largest video game company, one of the world's largest social media companies, and one of the world's largest venture capital firms and investment corporations.

It also has arms in popular game developers and studios, film productions, Snapchat, music companies like Spotify, and even a $1.5 billion streaming deal with the NBA.

Tencent is a very big deal, and I am still bullish on the stock. It took a 10% bath on the news, but I believe that with new political leadership, it'll be operating just fine in China and the U.S.

In fact, I recommended the company in February to Crow's Nest readers, and we're still up 45% — even after the worst possible news cycle.

That's because no matter what politicians try to do, they aren't going to stop this new wave of kids from using these products. Whether it's chats, video streaming, or gaming, there is plenty of market share for all of these tech companies.

I'm training my eyes on one in particular: online gaming.

It's growing faster than smartphones, the internet of things, artificial intelligence, and professional sports. In just a few years, the online gaming industry will be worth more than Microsoft itself.

So, ignore the political smoke and mirrors and simply follow the trends...

Godspeed,
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Jimmy Mengel

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Jimmy is a managing editor for Outsider Club and the investment director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto. For more on Jimmy, check out his editor's page.

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