The risks of physical new regulations on the technology sector are rising, Morgan Stanley strategist michael zezasi warned in a research note on Tuesday. But he noted that the firm still remained bullish on ad-driven Internet stocks such as Google parent Alphabet.,
Facebook parent meta platform,
snapchat parent snap,
The carefully constructed note claimed that the “bear case”, coupled with far more restrictive US regulation, would almost certainly hurt valuations in the internet sector—but Zezas sees the prospects of that scenario in the long run.
“Major governments are adopting a new regulatory approach to technology,” he says, in a note co-written by Brian Nowaki, which covers Internet stocks, and Benjamin Swinburne, which covers media companies. “Changes are imminent in Europe, where regulators are building on traditional media/com rules to establish a framework. Appreciable US moves will have a more mixed effect, but the bear case will hurt engagement and valuations in the internet sector.
Analysts say the “end is near” for the era of light-touch Internet regulation, which has been extended by 20 years. This approach, Zezas and his colleagues wrote, excluded technology platforms from traditional media and communications regulations to encourage investment and innovation, establishing safe-harbor protections against liability for damages resulting from content delivery. But it’s changing.
“Given the scale at which tech leaders have built, there is now increasing political and public momentum to enact the rules, including key developed market regions relevant to investors – Europe (including the post-Brexit UK) and the US.” are,” he writes.
In Europe and the United Kingdom, analysts warn, the application of media and communications regulations on tech companies is coming soon. They point out that later this month the EU Parliament will vote on a measure called “”.Digital Markets Act,” or DMA, which aims to “reinforce the impact of major technology platforms on competition and customers”. In the UK, they note, pending legislation called “online security billIt would establish a statutory “duty of care” obligation for social media and tech platforms, overseen by the country’s media and communications regulator Ofcom.
Zezas and his colleagues lay the groundwork for U.S. regulation, the case for the bulls and the bears.
Their base case is that the group will only see a modest increase in inspections. “While there is a political consensus for social media and broader technological regulation, our examination of existing legislative templates and public statements of the position by members of Congress show that the results of pragmatic US policy are greater than portability and antitrust issues, such as data transparency and Will focus more on content moderation,” he writes. “We see that these efforts are reflected in the actions taken by many state governments.”
The Bull case is that Congress agrees on the need for regulation, but cannot agree on the approach. If the 2022 midterm elections give Republicans control of one or both houses of Congress, he says, the result could be a legislative deadlock.
Bear’s case is that US adopts European-style approach to tech regulation, In that scenario, they write, “Public scrutiny, such as the one recently prompted by Facebook whistleblowers, persists. A more serious event, one with a specific election outcome, is the adoption of more aggressive content liability, data portability and antitrust actions.” In that scenario, agencies like the Federal Communications Commission could be allowed to keep track of more parts of the tech business, potentially forcing a shift to social-media business models.
The subtle conclusion of the report is that investors should “bear case in mind” without relying on it. “Investors should be wary of fundamental risk and potential multiple compression in terms of regulatory bears,” the analysts wrote. “Indeed, our sensitivity analysis emphasizes the negative impacts on ad unit pricing and engagement growth in digital ad names showing the potential for mid- to high single-digit impacts on annual ad revenue. However, more serious potential on online ad names. The effect is likely to be multiple compressions.”
The report said a single-digit hit to advertising fundamentals from greater regulation could trigger a 10% drop in Meta (ticker: FB) and Alphabet (GOOGL), and 30% for more volatile online advertising plays. or more such as Snap (SNAP), Twitter (TWTR), and Pinterest (PINS). And yet analysts say they’re less likely to play out the bear case — ego, they maintain their overweight ratings on Meta, Alphabet, Snap, and Pinterest.
Eric J. Write Savitz to [email protected]