Market Comment: Do tax and regulation spoil the IT party?

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This week started with declining stocks prices, as risks linked to taxation and regulation have triggered profit taking on the IT sector, in particular on Alphabet, Amazon and Facebook.

In the last five days, Amazon lost 10% of its market value, dragging the global IT sector down by more than 3%. Also, Facebook recently lost more than 10%. IT represents a significant part of market indices (26% of the MSCI US Index) and consequently, left its mark on stocks worldwide.

Looming regulation is impacting big IT platforms…

The technology sector was hit by Trump tweets, targeting Amazon and e-commerce in general. Trump claimed that the US Post Office is losing on each package delivered, as tech giants do not pay enough tax and are putting retailers out of business.

The US government could impose laws that make e-commerce sellers pay sales tax, that raise shipping fees at US Post Office or that regulate third-party sellers commission. Such measures, however, could bring adverse consequences for numerous small sellers that use the big e-commerce platforms, while the measures hardly have any impact on the platforms themselves.

The tweets of the US President come on top of an earlier Facebook data breach, that is hurting the short term sentiment for big tech platforms. Since the data breach came to surface, Facebook has lost 13%. History tells us that data breaches have an impact on both the short and long term. For example, when eBay had data management issues, the usage and advertisement on eBay dipped a quarter before it recovered. As such, Facebook could experience a temporary setback too.

The longer term impact of privacy regulation is more uncertain. Most likely, further steps can be expected to protect user data from third parties, but also to make it easier for users to refuse access to their private data.

… but their business models remain in tact

In the coming days, volatility could remain high for the IT sector and on equity markets in general. We do not consider the business model of e-commerce firms and big social media platform to be damaged, since they have become essential for people’s lives. Still, they would possibly have to adapt to new privacy and business regulations in the future.

All in all, we continue to have a neutral view on the IT sector. Earnings publications scheduled by the end of the month could reassure investors. We again expect strong results from the big platforms over 2018 with high double-digit earnings growth, as they continue to win from smaller rivals. As such, we continue to view the big platforms as one of the more interesting parts of IT.

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