As we have been expecting since March 2018, the leaders of the 2009 – 2018 bull market, the FAANGs, are now facing more and more headwinds and not one day goes by without the announcement of a new probe either for anti-trust positions or for taxation.

In addition, the results published by NETFLIX yesterday after the close of the market show that these stocks have reached the point of saturation of their home turfs and that the phenomenal growth rates the market had become accustomed to expect may not materialise at all, leaving these companies levitating at stratospheric valuations with no parachutes.

Netflix Results

Netflix Inc. shocked investors yesterday by reporting a drop in the number of U.S. customers and much slower growth overseas, a sign the streaming giant is losing momentum just as a competitors prepare to pounce.

The shares plunged as much as 12% to $318.31 in late trading after Netflix reported the loss of 130,000 customers in the U.S. — the result of higher prices and a weak slate of TV shows. It signedup 2.8 million subscribers internationally in the period, roughly half what the company predicted.

The quarter represents the disappointment for Netflix since 2011.

The second-quarter shortfall is renewing investor concern about the company’s heavy program spending and low profitability. The loss of customers in the U.S. was the first since the Qwikster debacle in 2011, and suggests Netflix may be running into price resistance or the limits of the addressable domestic market.

It has forecast it can reach as much as 90 million customers in the U.S., compared with 60.1 million currently. Analysts expect the company to have a blockbuster second half because of a heavy release schedule. Even after the slowdown last quarter, Netflix still expects to have its best year of customer growth in 2019.

But competition is coming.

Walt Disney Co. and Apple Inc. plan to introduce streaming services this year, while offerings from Comcast Corp. and AT&T Inc. arrive in 2020. Netflix has said these rivals won’t eat into its customer base, but competitors plan to take back rights to some of the service’s most-popular programs.

Earnings for the second quarter fell to 60 cents a share, representing a 30 % decline over the earnings of the second quarter of 2018 but beat analysts’ estimates of 56 cents.

Sales grew 26% to $4.92 billion, compared with projections of $4.93 billion.

An estimated $15 billion in cash content costs will continue to weigh on free cash flow, triggering a burn of almost $3.5 billion in 2019. Cash flow is expected to improve from 2020.

The stock had been up 35% for the year at the close of regular trading, nearly double the gain of the S&P 500.

However last nights 12 % fall to 322 is leaving NETFLIX 24 % lower than its all-time high recorded in July of 2018, almost exactly a year ago.

We are short the stock at an average price of USD 360.

 

Anti-Trust Scrutiny

In the past week, news of scrutiny and big ticket fines relating to the FAANGS have been constantly flowing.

Facebook Inc.

Facebook’s David Marcus had to defend the LIBRA crypto-currency project in first of Congress and the sharp fall in Bitcoins illustrates the worries that the Governments and Authorities now have vis a vis crypto-currencies.

We shorted BITCOINS at an average price of US$ 12’013 in June.

LIBRA may be the straw that will break FACEBOOK’s back and push Congress and the Government to reduce the power and potential reach of the company.

But beyond the LIBRA effect, Facebook announced this week that is had reached a settlement with the FTC regarding a 2102 probe on privacy whereby the Social Media giant agreed to pay US$ 5 Billion in fine.

The settlement with the Federal Trade Commission was quickly criticised by Lawmakers for being “woefully inadequate,”.

“It is clear that a $5 billion fine alone is a far cry from the type of monetary figure that would alter the incentives and behavior of Facebook and its peers,” Sens. Ed Markey (D-Massachusetts), Richard Blumenthal (D-Connecticut) and Josh Hawley (R-Missouri) wrote in a letter to the Commission on Tuesday . “We are concerned that the FTC has failed to impose strict structural reforms and managerial accountability that would put an end to Facebook’s privacy invasions.”

But that again was not enough for the week. U.S. technology giants are headed for their
biggest antitrust showdown with Congress in 20 years as lawmakers and regulators demand to know whether companies like Alphabet Inc.’s Google and Facebook Inc. use their dominance to
squelch innovation.

The House Judiciary antitrust subcommittee held a hearing Tuesday on the market power of the largest tech companies. Executives from Apple Inc., Amazon.com Inc., Google and Facebook had to testify.

Facebook’s Matt Perault denied that the company’s planned integration of its Messenger app, its WhatsApp chat service and its Instagram photo app was designed to thwart calls to break up the Company.

“There are many services in the market that offer more privacy-protective services,” he told Democratic Representative Jamie Raskin of Maryland. “Our pivot toward privacy with respect
to inter-operating our services was because of the competition that we faced in the market.”

Raskin had suggested the announcement was a “ploy” and said it coincided with growing calls to break up Facebook by splitting off WhatsApp and Instagram.

Facebook reports its Q2 earning on July 24th. We are short the stock at US $ 183

 

Amazon Inc.

The European Commission opened a formal investigation to assess whether AMAZON misuses sensitive data from independent retailers on its sales platform, the authority said in an emailed statement on Wednesday.

Amazon.com Inc.’s “dual role” as a retailer and host to other sellers will be probed by the European Union amid suspicions that the online retail giant uses the information it gains for its own advantage.

Ramping up the probe allows officials start to build a case that could ultimately lead to fines or an order to change the way the Seattle-based company operates.

“Amazon appears to use competitively sensitive information — about marketplace sellers, their products and transactions,” the EU said. Officials will check whether Amazon as a retailer in its own right benefits from the overall picture on sales it sees by smaller rivals.

It will also look at how Amazon selects winners of the ‘best buy’ box which “seems key for marketplace sellers as a vast majority of transactions are done through it.”

Regulators have gathered huge amounts of data for the probe as they worry that online firms are becoming gatekeepers, monopolizing information that could also be a valuable resource for others, EU Competition Commissioner Margrethe Vestager said in a January speech.

Just as it faces the bigger European Union investigation into its use of sellers’ data, Amazon.com Inc. struck a deal with Germany and Austria to shut down antitrust probes into how it handles
other merchants on its site.

The U.S. retail giant will change its business services agreement worldwide in mid-August to address a number of complaints from sellers, the German Federal Cartel Office said in an emailed statement on Wednesday. “We have obtained far-reaching improvements for sellers
active on Amazon marketplaces worldwide,” Andreas Mundt, president of the German regulator, said in the statement. “The proceedings are now terminated.”

They may have closed in Germany and Austria but the same topic was actually debated in in the Congress hearing last Tuesday and the exchanges were heated.

Democrat David Cicilline of Rhode Island, who is chairing the hearing, pressed Amazon on whether its business model suffers from a conflict of interest because it sells its own products that compete directly against those from third-party sellers.

That is a complaint also raised by Democratic presidential candidate Elizabeth Warren.

“You are selling your own products on a platform you control and they’re competing with products from other sellers,” Cicilline said.

Amazon lawyer Nate Sutton said it’s common in retail for stores to sell their own brands that compete against others.

Cicilline fired back: “The difference is Amazon is a trillion-dollar company that runs an online platform with real- time data on millions of purchases and billions of commerce and can manipulate algorithms on its platform and favor its own product — that is not the same as a local retailer,” he said.

Cicilline repeatedly pressed Sutton about whether the company uses data on the third-party sellers to advantage its own products. Sutton said Amazon ranks results by the same criteria and doesn’t use data to compete against sellers.

“You do collect enormous data,” Cicilline said. “You’re saying you don’t use that in any way to promote Amazon products, and I remind you sir, you’re under oath.”

The Company reports its Q2 earnings on July 25th. We are short the stock at US$ 1918

 

More Generally, the atmosphere is becoming resolutely negative…

Tuesday’s hearing was one of several that big tech companies face this week in Congress as Washington calls the giants to task for a range of concerns.

President Donald Trump has been pressuring the companies in Twitter barrages for issues
including anti-conservative bias, while the Justice Department and the Federal Trade Commission have taken the first steps toward investigating their conduct.

The Justice Department is taking responsibility for scrutiny of Google and Apple, as the
FTC oversees Facebook and Amazon.

The Chairman of the Committee Cicilline slammed the dominance of the tech companies,
saying they are shielded from competitive threats because of barriers to rivals that could potentially take them on.

They also use their resources to prevent startups from challenging them and pose a risk to small businesses, he said.

Cicilline said the dominance of tech companies stems from policy choices. Antitrust enforcers haven’t challenged a single one of their acquisitions or sued them for anticompetitive conduct like they did with Microsoft Corp. 20 years ago, he said.

“Congress and antitrust enforcers allowed these firms to regulate themselves with little oversight,” Cicilline said in his opening remarks. “As a result, the internet has become
increasingly concentrated, less open, and growingly hostile to innovation and entrepreneurship.”
“Together, these enforcement decisions have created a de facto immunity for online platforms,” Cicilline added.

European Taxation

Congress’ concerns are also shared by European countries to whom the big US tech giants escape taxes in their countries and in Europe in general.

A French-U.S. clash over digital taxation overshadowed the start of a Group of Seven finance chiefs meeting yesterday as France refused to flinch on its plan to impose levies that will hit American tech giants.

Just before an encounter with U.S. Treasury Secretary Steven Mnuchin at the G-7 near Paris, French Finance Minister Bruno Le Maire pledged to forge ahead with a 3% levy on digital
revenues of large companies.

France hopes its drive will pressure the U.S. to be more constructive in talks at the Organization for Economic Cooperation Develop to develop a similar tax on profits in 129 countries.

“We will make every effort to get an agreement on digital tax here at the G-7 and open the path to a solution in 2020 at the OECD,” Le Maire told reporters. “It will be difficult, I know the U.S. position has toughened recently.”

Le Maire’s defiance is likely to meet with a chilly response from U.S. President Donald Trump’s administration.

According to a report on Wednesday in Spanish newspaper El Mundo, the U.S. State Department has sent letters to embassies in several countries, including Spain, ordering them to alert
governments that retaliation will follow if they go down the same path as France.

“A great number of countries are now taking this line — the U.K. has moved forward, Austria wants to do it,” Spanish Economy Minister Nadia Calvino said about the potential of digital taxation, speaking to Cadena Ser radio. “At the European level, practically all of us are in agreement.”

U.S. Trade Representative Robert Lighthizer already reacted last week to the French parliament’s approval of the tax by launching a probe to determine whether the measure is “discriminatory or unreasonable and burdens or restricts United States commerce.”

The U.S. could ultimately impose retaliatory tariffs or other trade limits, or even use provisions in the tax code to punish French citizens and companies.

In the discussions for a global digital tax at the OECD, France has agreed to consider a U.S. approach that would target all businesses with a significant digital activity. But Le Maire
said France still wants a global solution to take into account the advantages purely digital companies get from their giant networks.

“We have made clear step in the direction of our American friends,” Le Maire said. “Now I’m waiting for the same kind of step from the Trump administration and the U.S.’’

Still, Le Maire claims he has a good working relationship with Mnuchin that will help the two sides find compromise. “We are not far from a compromise, we just need one step further,” Le Maire said.

At the end of the day, the truth of the matter is that the US tech giants have become too big and are now seen as a menace by sovereign nations, including the US itself.

We had highlighted that this would be the case back in March 2018 and what is clear is that pressure and costs will increase form here and not decrease.

Considering their hefty valuations, the downside in their stock price could be considerable and we remain short these stocks.

Another convenient way to short them is the following structured product launched by LEONTEQ.