What the Election Could Mean for Big Tech Stocks

The US presidential election will have major consequences for the regulatory landscape that Big Tech will face in the coming years.

Lawmakers initially celebrated tech giants such as Microsoft MSFT, Amazon.com AMZN, and Meta META for their disruption, creation of jobs, and promotion of economic growth—but since they have gotten bigger, the attitude toward them in Washington has evolved. Lawmakers have become more critical as these companies have amassed sizable influence over slices of the global economy.

As such, these large technology companies face a plethora of regulatory headwinds. At the same time, the extent of this regulatory scrutiny depends on how aggressively the US government chooses to pursue existing court cases and how much oversight it provides on proposed acquisitions.

Since the election of President Joe Biden in 2020 and his subsequent nomination of Lina Khan as the head of the Federal Trade Commission, there has been a marked shift in how the US government has engaged with large technology companies. The Khan-led FTC has had a major impact on the Big Tech mergers and acquisitions playbook.

The scrutiny of deals—from large ones such as Microsoft and Activision to small bolt-on acquisitions such as Amazon and iRobot—has been intense. We see a continuation of this approach if a Democratic administration remains in power.

While former President Donald Trump is far from a proponent of Big Tech, as evidenced by the Department of Justice under his presidency filing an antitrust suit against Google in 2020, we believe the Republican Party’s general aversion to business regulation could be important as it relates to Big Tech. In particular, if Trump is elected to a second term, we expect a shift in how the FTC evaluates Big Tech M&A, providing these large technology incumbents a way to flex their acquisition muscles again.

Here’s how different outcomes of the November elections could impact Big Tech M&A.

Scenario 1: Democratic President, Democratic Senate

If Vice President Kamala Harris wins the presidential election and the Democratic Party maintains control of the Senate, we believe that we will see continued intense regulatory oversight of Big Tech M&A.

Over the past three-plus years, Big Tech M&A has declined precipitously.

The only notable large Big Tech acquisition under the Biden administration has been Microsoft’s acquisition of Activision. While that deal was approved by European regulators, allowing Microsoft to close the deal, it remains under the scrutiny of the FTC, which is still pursuing its complaint against the acquisition.

While Harris’ California roots and prior views in support of large tech M&A have spurred some analysts to hypothesize that a Harris administration could adopt a more lenient view toward Big Tech regulation, we think that a material change in the government’s antitrust posture toward Big Tech is highly unlikely, especially with control of the White House as well as the Senate. According to her voting record as a US senator, Harris was one of the most liberal senators seated. She was also vice president as the FTC decided to pursue a significantly more aggressive antitrust enforcement regime.

Following a Democratic sweep, we envision Big Tech staying away from large M&A and instead focusing on buying back shares while continuing to invest heavily in artificial intelligence.

Scenario 2: Democratic President, Republican Senate

We think that a Democratic White House and a Republican Senate is likely a better scenario for Big Tech than a Democratic sweep. However, we don’t expect a material slowdown in antitrust enforcement concerning Big Tech M&A even if there’s a split Washington.

Prominent Democratic donors such as LinkedIn co-founder Reid Hoffman (who is on the Microsoft board of directors) and IAC IAC chair Barry Diller have publicly come out against the current antitrust regime and have called for Harris, if elected, to replace Khan as FTC chair.

If the Democrats sweep, we think it is unlikely that Harris would replace either Khan or Jonathan Kanter, the DOJ’s top antitrust official. The likelihood of her replacing them in a split Washington is slightly higher. We believe that Republican backlash against Khan as well as pressure from prominent Democratic donors could force Harris to opt for a more moderate approach to Big Tech regulation, which could include replacing Khan and Kanter.

Scenario 3: Republican President, Democratic Senate

If Trump wins the presidency, we think it is likely that he will nominate new heads for the FTC and the DOJ’s antitrust division.

However, his administration’s replacements for Khan and Kanter would be tempered by a Democratic Senate, likely resulting in a nominee who is critical of Big Tech but unlikely to take the same combative posture as the current FTC and DOJ.

Scenario 4: Republican President, Republican Senate

We think a Trump presidency and Republican control of the Senate is likely the best-case scenario for Big Tech from an antiregulatory perspective.

With Republicans controlling both the White House and the Senate, we would expect Khan and Kanter to lose their positions. We would expect Republicans to nominate pro-business individuals who would likely pursue a more lenient approach toward Big Tech M&A. While we expect Big Tech M&A to remain under FTC and DOJ scrutiny, we believe that there would be a material decrease in the aggressiveness of antitrust enforcement in the Republican sweep scenario.

While a Republican sweep is likely the best-case scenario for Big Tech, we note that Trump has been critical of censorship efforts of companies like Alphabet GOOGL and Meta, and other Republican representatives and senators have joined the fray.

But we don’t expect these critical views to fundamentally drive Republican decision-making in terms of nominating new leaders for the FTC and the DOJ’s antitrust division. Ultimately, we believe that the Republican Party’s pro-business core will likely successfully lobby for an antitrust enforcement regime less combative than the incumbent one.

We also believe that this expectation of a more lenient approach to Big Tech M&A is part of the reason why some prominent venture capital firms have increased their donations to the Republican Party in 2024.

The Overall Regulatory Environment Remains Challenging

We believe that increased regulatory enforcement against Big Tech M&A dovetails with a broader shift in antitrust action against these firms. While Big Tech M&A has slowed dramatically over the past few years, the number of Big Tech monopoly cases has ticked up. As of now, Alphabet, Amazon, Nvidia NVDA, Apple AAPL, and Meta all have open cases against them in which they’re accused of engaging in monopolistic practices in their respective businesses.

Even if more-moderate leaders preside over the FTC and DOJ, we don’t expect these monopoly cases to disappear. However, we believe that the nature of the remedies proposed by the FTC and the aggressiveness with which it pursues antitrust enforcement will likely be toned down.

Beyond monopoly cases, we think that regulators and lawmakers are likely to take a more aggressive stance on AI. We believe this additional oversight will likely increase the regulatory burden on Big Tech, pushing these firms away from the usual “move fast and break things” type of product development they are accustomed to.

Regulators across Europe and the US are investigating various investments that Big Tech firms have made in AI startups. While we expect Big Tech companies to overcome their respective legal challenges in this regard, we don’t expect this pressure from regulatory authorities to dissipate, especially in a field that is garnering as much attention as AI.

Also, we believe legislators are increasingly looking to push more stringent privacy and data protection policies that could affect Big Tech. Europe’s General Data Protection Regulation has forced Big Tech to change some practices around data management, storage, and protection. We believe that similar legislation could be proposed in the US, further increasing Big Tech’s regulatory burden.

2 Top Investing Picks in Big Tech

Our top stock picks in Big Tech are:

1. Microsoft
2. Alphabet

Microsoft

• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Estimate: $490
• Price/Fair Value Estimate (as of Oct. 2, 2024): 0.86

Microsoft has demonstrated that it is adept at maneuvering behind the scenes, even in a restrictive environment. Should the atmosphere ease, Microsoft has a large war chest and a clear strategy, so we think it would deploy capital in AI-related bolt-on deals to accelerate its research and development efforts. That said, we think Microsoft shares are attractive regardless of which party comes out on top in November.

Alphabet

• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Fair Value Estimate: $209
• Price/Fair Value Estimate (as of Oct. 2, 2024): 0.80

While Alphabet, unlike Microsoft, is very much under the regulatory microscope, we believe the damage dealt to the firm’s valuation as a result of antitrust challenges has been overly punitive, offering investors an opportunity to buy shares at an attractive price.