“Techlash” Threatens Most Tech Stocks
Ever since the term “fake news” entered the zeitgeist, public opinion has turned against Silicon Valley’s most famous inhabitants.
Customers are upset at Facebook, Inc. (NASDAQ:FB) for its abuse of private data, at Alphabet Inc (NASDAQ:GOOG)—aka Google—for its secret deals with the Pentagon, and at salesforce.com, Inc. (NYSE:CRM) for providing support to border protection agencies.
But despite this barrage of anti-tech sentiment, one company remains unscathed: Apple Inc. (NASDAQ:AAPL). Public perception of Apple is strangely upbeat.
This matters greatly to our AAPL stock forecast.
Why? Well, because the backlash to tech companies isn’t being led by a bunch of hippies in oversized tie-dye shirts. It is a sophisticated movement.
According to recent polls, 73% of Americans distrust big corporations when it comes to data privacy. So there is a definitive political coalition in favor of tightening regulation on tech stocks. (Source: “New Survey Finds Deep Consumer Anxiety over Data Privacy and Security,” PR Newswire, April 16, 2018.)
Just look at Europe if you’re skeptical.
The European Union’s General Data Protection Regulation (GDPR) went into effect at the start of this summer, meaning that all tech companies—whether they’re based in Europe or America or China—are forced to comply with a heap of new regulations.
These rules give EU citizens the “right to be forgotten” by tech providers. So, if for some reason you decide that the world is better off without your Twitter ramblings, you can delete the whole thing: your account, the metadata, and the psychographic profile.
All traces of your social media footprint can cease to exist, if you so choose.
From a consumer standpoint, this is great. I would personally love being able to opt out of databases. But there’s no denying that this is utterly terrible for investors.
The GDPR could wipe out billions of dollars in revenue.
Goldman Sachs Group Inc (NYSE:GS) has a great summary of the regulation’s potential effects, including what could happen to Facebook’s and Google’s financials.
Here’s a telling quote from Goldman Sachs:
Our analysis shows that Alphabet’s net advertising revenue could see a -2% to 0% impact from GDRP, given our view that Search is largely protected as it relies less on user data to generate advertisements. Facebook could potentially see a negative impact of up to 7%.
(Source: “Facebook could see a 7% decline in revenue due to new European data laws,” Fast Company, April 9, 2018.)
Translation: Facebook stands to lose $2.8 billion in revenue.
This loss of revenue could show up in Facebook’s fall earnings report. I don’t think the GDPR will blast as big a hole as some people think, but it could certainly spook the market into selling off FB stock.
Meanwhile, AAPL Stock Is Protected
What’s interesting about the GDPR is that it targets a specific business model, the kind that sees consumer data as a commodity.
Apple doesn’t do that. It sells smartphones, tablets, laptops, watches, TV boxes, earphones, and other things that fall into the purview of ordinary commerce.
I find that this loyalty to users protects Apple from regulations like GDPR. After all, the “techlash” isn’t against all modern convenience; it’s a targeted attack against companies that provide free services in exchange for users’ private data.
“Free” services. Ha! Someone has to pay for the time we spend scrolling through social media. And if you’re not the consumer, you’re probably the product. Remember that.
In any case, let’s get back to AAPL stock. How does this regulatory mumbo-jumbo correlate to Apple’s share price?
Simple: I think fear will drive money from software to hardware.
As a subsector, software and services outperformed technology, hardware, and equipment in the front half of 2018 (13.5% to 7.4%). But once GDPR-affected earnings start to register, I’m betting that money rotates into hardware stocks.
All it takes is three or four subpar quarterly reports for the media to start clanging the death knell.
And since there are a lot of portfolios out there with mandates to invest in tech stocks (diversification is a built-in feature of most funds), we can be reasonably sure that money will stay within the sector.
As for why we’re looking at Apple in particular…
AAPL Stock Forecast: $1.0 Trillion and Beyond
Apple can do things that no other company can even dream of, like clip a $100.0-billion (that’s billion with a “b”) business line onto its nearly $1.0-trillion core business. Don’t believe me? Look at Apple’s bet on content streaming.
What you’ll find is that Apple has its own “Netflix” (“Apple TV”), its own “Spotify” (“Apple Music”), and twice as many users as both of those services combined.
If the company persuades some portion of those users to sign up for an “Amazon Prime”-like membership, we’re looking at a massive influx of revenue.
So, once you factor in that potential, plus the current rate of share buybacks and dividends, we could see the AAPL stock price reach $300.00 in 2019.
But we needn’t go that far to see Apple’s market cap hit $1.0 trillion. The share price is 10% away from that level, meaning that AAPL stock need only stay on track to become the first company with a 13-digit valuation.
Given the rise in global volatility (i.e. trade war), blue-chip stocks like Apple could start trading at a premium. I don’t think the market has made that shift yet, since everyone is desperate for the party to go on.
So, investors who act quickly have a chance to make money on what is already the biggest stock on the planet.
The icing on the cake is “Apple News,” which, unlike its counterparts at Facebook and Google, is handpicked by human beings. Not an algorithm, but real honest-to-goodness humans. (Source: “Apple CEO Tim Cook Pulls Ahead of Rivals In News Curation Battle,” Fortune, June 26, 2018.)
“We felt that the top stories should be selected by humans,” said Cook at a recent event in San Francisco. “I’m not being critical of people who do something different, but Apple has always stood for curation. We’ve always believed in quality, not quantity.”