Investors looking to put money into U.S. and China internet giants should be cautious as these companies are facing a myriad of challenges, strategists told CNBC.
Investment bank Macquarie said large consumer tech companies like Facebook and Amazon are in the “sunsetting” phase.
“You have to be very careful when you approach companies like [Facebook-parent] Meta or Alphabet because as I said, in my view, they are sunsetting. They’re suffering from a number of issues,” Viktor Shvets, head of global and Asian strategy at Macquarie Capital. He also named other companies like i-Phone maker Apple and Chinese e-commerce platform Alibaba.
Headwinds may include “major economies of scale,” as well as significant political and social pressure, Shvets told CNBC’s “Street Signs Asia” on Thursday.
“So be very careful about these large digital platforms, but there are a lot of opportunities and profitable opportunities in the rest of [the] tech universe,” he said.
Both American and Chinese tech giants have come under regulatory scrutiny in recent years.
In the past year, Chinese authorities cracked down on its tech companies, introducing legislation targeting areas from anti-monopoly to data protection.
Shares of Tencent, Alibaba and Didi sold off last year as the companies were caught in the regulatory crosshairs. The Hang Seng Tech index is still down more than 40% compared to a year ago, as of its Feb. 11 close.
In the U.S., President Joe Biden last year signed a new executive order aimed at cracking down on anti-competitive practices in Big Tech, among other sectors.
Next generation tech bets
The world is set to transit from second-generation technologies to third-generation, said Shvets. The question is: Which tech companies will survive that major transition?
“One thing we have learned in those transitions — that only one or two companies actually make it through. So for example, Microsoft is really the only major technology company to move from first generation to second — pretty much nobody else [has] done that,” he said.
“So the question with those large digital platforms, which one of those companies do you think has the greatest opportunity or possibility or capacity to actually transit? And right now, it’s not clear. Should you bet on Meta, should you bet on Google, should you bet on [Alibaba]? It’s unclear.”
Shvets did not specify what the third-generation tech transition will entail, but the buzz around Web 3.0, or the next generation of the internet, started growing late last year.
Metaverse refers broadly to a virtual world where humans interact through three-dimensional avatars. In that space, users can engage in virtual activities such as gaming, concerts or live sports that can be controlled via virtual reality headsets or augmented reality gear.
Facebook-parent Meta, Apple, Microsoft and Google are gearing up to release new hardware products and software services for the metaverse.
Social networking giant Facebook changed its name to Meta late last year, reflecting the company’s growing ambition to embrace the future of the internet in a virtual world. However, the stock plunged in early February and recorded its largest one-day drop, after the company forecasted weaker-than-expected revenue growth in the next quarter.
Meta reported that its Reality Labs segment made $877 million in revenue in the fourth quarter with an operating loss of $3.3 billion.
‘Ferociously competitive’ markets in China
While China’s big tech companies are under tremendous regulatory pressure, they are also facing a lot of strong competition, says Roderick Snell, an investment manager at Edinburgh-based Baillie Gifford.
He said his firm has been underweight on big tech names such as Alibaba and Tencent for the last couple of years. An underweight stock rating indicates an analyst believes the firm’s stock will not perform as well relative to its peers in the market.
“I still think … the biggest issue for the likes of Alibaba, Tencent in China is always the most ferociously competitive market in the emerging markets,” he told CNBC’s Pro Talks on Wednesday.
“The likes of Tencent’s 40% market share in social media advertising has gone to other players … in the past three or four years,” Snell said. “So that’s actually my biggest concern … the amount of competition that’s coming in. So we’ve been underweight … and [keeping] the opportunities elsewhere.”
“Probably won’t be changing that in the future,” he added.
— CNBC’s Laura Feiner contributed to this report.