Congress Can’t Be Good for Social Media Stocks

Political junkies often spend a great deal of time on web sites like Politico, The Hill and Roll Call. These are sites that describe what’s going inside Congress, the White House and executive agencies. They dig deep into the legislative and rule making process.

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  • Sites like that are useful for many individuals, especially if Congress or executive agencies are interested in their business. Energy companies, for example, are often subjected to new rules and the rules can carry costs.

    It’s rare to see an article on political sites that is good for a company. Congressional oversight or new rules from regulators tend to be costly and, although the rules are often beneficial to society in some way, some investors might tend to prefer to focus on companies that are out of the spotlight.

    That’s simply because the spotlight in Washington creates a degree of unpredictability. This is why it is important for investors to think about the implications of Congress’ interest in social media companies.

    Social Media Goes to Capitol Hill

    Social media companies including Facebook (Nasdaq: FB) and Twitter (NYSE: TWTR) have been called to testify before Congress several times. But, as Politico recently noted, the level of scrutiny is increasing.

    According to the site,

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  • “Twitter CEO Jack Dorsey testified in Congress for a grueling seven-plus hours Wednesday — joined for some of that time by Facebook COO Sheryl Sandberg…here are a few points to consider from the back-to-back Senate Intelligence and House Energy and Commerce hearings:

    —Sen. Joe Manchin (D-W.Va.) brought up the possibility of further altering Section 230 of the Communications Decency Act.

    The provision protects websites from lawsuits over content posted by users, but Manchin suggested a carveout may be necessary to combat the sale of opioids on social media, similar to a recently passed measure that targets online sex trafficking.

    —When Facebook CEO Mark Zuckerberg testified before Congress in April, the internet was flooded with memes of lawmakers asking rudimentary questions, raising concerns about Congress members’ basic tech knowledge.

    But no such narrative emerged after Wednesday’s hearings. That may be due to the greater level of sophistication from lawmakers, who dug into complex topics like microtargeting, the companies’ online ad businesses, ethical questions about overseas expansion, and, as mentioned above, Section 230.

    — “I think it’s critical that we get to better transparency and better accountability,” House E&C Chairman Greg Walden (R-Ore.) told reporters following the hearing. “And we’ll have more questions we want Mr. Dorsey and Twitter to answer.”

    But Rep. Matt Gaetz (R-Fla.), who has accused Twitter of silencing him and other GOP lawmakers, voiced frustration with the House’s Dorsey session and Majority Leader Kevin McCarthy’s (R-Calif.) letter urging the E&C panel to take up the issue.

    “The majority leader talks tough on tech then sends [Dorsey] to the friendly confines of the industry-friendly Energy & Commerce Committee,” Gaetz told The Hill.

    All of this indicates more scrutiny is likely, and the news confirms that.

    Potential Fallout For Social Media Could Be Costly

    After the hearing, Attorney General Jeff Sessions raised the stakes in social media bias complaints by announcing that the Department of Justice (DOJ) plans to convene state attorneys general to discuss “a growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas on their platforms.”

    Politico then noted that “tech industry officials are worried that all the political rhetoric around the issue is turning into something that could have real consequences.”

    “A DOJ source said the session with Sessions and the local officials is set to take place September 25 and had been scheduled before the hearing to address the attorney general’s longstanding concerns.”

    Sessions’ outreach to state attorneys general is significant — many of the regulatory actions taken against the tech industry in recent years have happened on the local level. California recently passed a set of privacy rules widely opposed by the industry, and Missouri Attorney General Josh Hawley, a Republican, has announced that he’s investigating Google on antitrust and privacy grounds.

    Hawley said at the time, “I will not let Missouri consumers and businesses be exploited by industry giants.”

    Stocks Could Take Time to Recover

    This news had an impact on some companies in the sector. TWTR was already under pressure and fell more on the news.

    FB has been trying to recover from earnings related news and the potential for additional oversight adds to traders’ concerns that the company may not grow as fast in the future as it did in the past.

    Snap (NYSE: SNAP), another social media company, reached new lows on the news.

    SNAP has been in a significant downtrend since the stock began trading and more oversight could be a significant issue for the company.

    Even Alphabet (Nasdaq: GOOGL), the parent company of Google, pulled back on the news as the long term chart below shows.

    But, Google is, of course, more than a social media company and generates significant revenue from its search business.

    For now, that diversified revenue stream could be the most important consideration for traders in the sector. Social media is unlikely to benefit from the interest of Congress and traders may want to wait for an up trend before buying into the sector.

    Other internet companies like Alphabet and Amazon could still deliver gains since they rely on other revenue streams.

    This all demonstrates the need to dig deep for investment ideas right now. It could be best to focus on companies that aren’t in the spotlight but that will require research that can take an extended amount of time.

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