New technical rules are coming. Buy Meta and Alphabet anyway, Morgan Stanley says.

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Morgan Stanley is still bullish on Alphabet, Meta Platforms, Snap and Pinterest.

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Risks of important new regulations to the tech sector are increasing, warns Morgan Stanley strategist Michael Zezas in a research note on Tuesday. But he notes that the company nonetheless remains bullish on advertising-focused internet stocks like Google’s parent company.


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The carefully crafted memo asserts that the “bear case”, with much more restrictive US regulations, would almost certainly hurt internet industry valuations, but Zezas finds the chances of that scenario playing out to be long.

“Key governments are pursuing a new regulatory approach to technology,” he says, in a memo co-authored by Brian Nowak, who covers Internet stocks, and Benjamin Swinburne, who covers media companies. “Changes are imminent in Europe, where regulators are relying on traditional media / communications regulations to establish a framework. Plausible US measures would have a more mixed effect, but the bearish case would hurt engagement and valuations in the internet sector.

Analysts say the “end is nigh” for the era of light Internet regulation, which has stretched for 20 years. This approach, write Zezas and his colleagues, excluded technology platforms from traditional media and communications regulations to encourage investment and innovation, establishing safe haven protection from liability for damage caused by content distribution. . But that is about to change.

“Given the scale that technology leaders have built, there is now growing political and public momentum to impose regulations, including in key developed market regions of relevance to investors – Europe (including the Post-Brexit UK) and the US, ”they write.

In Europe and the UK, analysts warn, enforcement of media and communications regulations for tech companies is coming soon. They point out that later this month the European Union’s Parliament will vote on a measure called the ‘Digital Markets Act’ or DMA, which aims to ‘limit the influence of major technology platforms on competition and customers “. In the UK, they note, pending legislation called the “Online Safety Bill” would establish a legal “duty of care” obligation on social media and tech platforms, giving Ofcom oversight, the country’s media and communications regulator.

Zezas and his colleagues present base, bull and bear cases for US regulation.

Their base scenario is that the group will only see a modest increase in surveillance. “While there is political consensus for social media and broader technology regulation, our review of existing legislative models and public position statements by members of Congress suggests that plausible outcomes of U.S. policy will focus more on the data transparency and content moderation as on portability and antitrust issues, “they write.” We see these efforts reflected in the actions of several state governments. “

The bull’s 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, they add, the result could be a legislative deadlock.

The bearish case is that the United States is taking a European-style approach to technology regulation. In this scenario, they write, “public scrutiny, such as that sparked by Facebook’s recent whistleblower, persists. A more serious incident, associated with a specific election result, leads to the adoption of more aggressive actions on content liability, data portability and antitrust. In this scenario, agencies such as the Federal Communications Commission could be granted oversight over more parts of the tech industry, which could force changes in the social media business model.

The report’s nuanced conclusion that investors need to “deal with the bears” over and over again. “Investors should be aware of the fundamental risk and the potential multiple squeeze of the regulatory bear case,” analysts write. “Indeed, our sensitivity analyzes focusing on the negative impacts on the price of ad units and the growth of engagement through digital ad names show the potential for mid-to-mid single-digit impacts. high on annual advertising revenue. However, the most serious potential impact on online ad names is probably multiple compression. “

The report says a single-digit impact on advertising fundamentals due to increased regulation could trigger a 10% drop in Meta (Symbol: FB) and Alphabet (GOOGL), with a potential drop 30% or more for more volatile online advertising games. like Snap (SNAP),


Twitter

(TWTR) and Pinterest (PINS). And yet, analysts add that they place a low probability that the bear case will unfold – as a result, they maintain their overweight ratings on Meta, Alphabet, Snap, and Pinterest.

Write to Eric J. Savitz at [email protected]


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