Thursday’s virtual hearing before the US House Committee on Energy and Commerce is the latest in a series of regulatory challenges that has besieged social media companies, more so since the deadly Capitol riots on 6th January.
What’s the fuss?
Essentially, Congress wants to hold these social media companies more accountable for the spread of misinformation and disinformation across their platforms. However, these companies are currently able to claim legal protection under the 26 words that make up Section 230 of the Communications Decency Act of 1996. Under this law, these companies enjoy limited liability for the content that users post.
Both Republicans and Democrats want to change that fact, which may adversely impact how these platforms operate. Even US President Joe Biden had spoken about revoking Section 230 in the past.
Tech stocks facing multiple headwinds
Amid such heightened scrutiny, these social media stocks have not fared so well in recent months. The broader selloff in in US tech stocks in the wake of surging Treasury yields and concerns over extended valuations has only compounded matters.
- Facebook has been trading sideways since registering its highest ever closing price on 26 August. A gust of gains this month has helped its 50-day simple moving average (SMA) avoid colliding with its 100-day counterpart. However, Zuckerberg’s company’s share price remains 7.16% lower from that record high.
- Alphabet’s stock prices have fared relatively better than Facebook in 2021, though it still has been kept rangebound since posting its record high on 17 February. The stock has fallen 3.91% since then, though appears to be well-supported above the psychologically-important $2000 line.
- Twitter’s peak on 1 March is the most recent record high compared to Alphabet’s and Facebook’s. Yet, Dorsey’s company has endured a torrid March, having unwound much of February’s gains and has plummeted to its 50-day SMA. Twitter now languishes 20% below its record high.
How markets react to Zuckerberg, Pichai, and Dorsey’s comments today could also have a major bearing on the FXTM Social Media index’s near-term performance. Note that this equally-weighted index comprises shares of Facebook, Google, Twitter, and Snapchat.
How resilient are social media stocks?
To be clear, these social media CEOs have weathered many a grilling by US lawmakers in the past, and their respective stocks have held up relatively well under such scrutiny.
Here’s how they’ve performed compared to key indices on a year-to-date basis:
- Alphabet: +16.74%
- Twitter: +14.61%
- Facebook: +3.29%
- Snapchat: +0.88%
- Dow: +5.93%
- S&P 500: +3.54%
- Nasdaq 100: -0.69%
- FXTM Social Media index: +14.64%
How could these legal hurdles impact social media stocks in 2021?
As these regulatory challenges gather momentum, it could translate into stronger headwinds for social media stocks, potentially causing them to lag the broader US market as the year progresses. That would be a far cry from the way these tech giants powered US indexes higher throughout the pandemic in 2020.
This will not be the last that we’ll hear of regulators bearing down on how these platforms go about their business. Depending if, when, or what revisions are made to Section 230, the likes of Alphabet, Facebook, and Twitter may have to eventually incur more operating and legal costs. These social media companies could potentially be exposed to lawsuits from the public too. Investors may then be sensitive to how efforts to remain compliant with the law could weigh on these companies’ bottom line.
Considering that any revision or perhaps even the revoking of Section 230 won’t happen overnight, shareholders of Facebook, Alphabet, and Twitter may just have to endure a bumpy ride along the way. This added layer of uncertainty may well cap the upside for these social media stocks until this protracted saga reaches its eventual conclusion.
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