Markets

Chamath Palihapitiya: Here's why you go short big tech stocks Facebook and Alphabet right now

Key Points
  • Chamath Palihapitiya, founder and CEO of investment firm Social Capital, built a bear case on Facebook and Google parent Alphabet in a series tweets Friday.
  • The former Facebook executive said there are a handful of negative catalysts to drive the shares down over the next few years, including increased regulatory scrutiny, taxes and new product experiences.
  • "Big Tech's long term success is no longer about better products," Palihapitiya said. "They are incumbents and their success is now a multi-variate/multi-dimensional problem of competition, anti-trust, tax and regulatory multiplied by EVERY city, state, country and jurisdiction in which the operate."
Chamath Palihapitiya
Olivia Michael | CNBC

Former Facebook executive Chamath Palihapitiya on Friday laid out his bearish case for the social media giant as well as Google parent Alphabet.

Palihapitiya, founder and CEO of investment firm Social Capital, said in a series of tweets that there are a handful of negative catalysts to drive these shares down over the next few years, including increased regulatory scrutiny, taxes and new product experiences.

"Big Tech's long term success is no longer about better products," Palihapitiya said in a Friday tweet. "They are incumbents and their success is now a multi-variate/multi-dimensional problem of competition, anti-trust, tax and regulatory multiplied by EVERY city, state, country and jurisdiction in which the operate."

Facebook and Alphabet have been a relatively bright spot in a market that experienced unprecedented disruptions from the coronavirus pandemic. Shares of Facebook have climbed 17% this year, while Alphabet has gained more than 13%. 

Investors piled into mega-cap technology companies this year for their insulation from the global health crisis. Thanks to the resilience of Big Tech, the Nasdaq Composite became the first major U.S. equity benchmark to hit a new high.

Increased regulation

Palihapitiya believes that governments around the world are getting increasingly "threatened" by the tech duo.  

"The most basic encapsulation is that $FB and $GOOG threaten to disrupt the business model of allocating and distributing political power," Palihapitiya said.

In June last year, the House Judiciary Committee opened an antitrust investigation into Amazon, Apple, Facebook and Google amid concerns that their unmatched market power is suppressing competition in digital markets. 

"For customers, regulation could slow down their velocity of spend," Palihapitiya said. "A good recent example was the advertiser boycott on $FB. If regulations on hate speech, free speech get stricter for $FB and $GOOG, it becomes harder to monetize all impressions and will make ad rules stricter."

Last month after a boycott from more than 100 brands, Facebook changed its policies to prohibit hate speech in its advertisements, banning those claiming people from a specific race, ethnicity, nationality, caste, gender, sexual orientation or immigration origin are a threat to the physical safety or health of anyone else.

Palihapitiya also sees global governments increasing taxes on these tech giants in the aftermath of the coronavirus pandemic.

"With governments crippled economically because of the pandemic, they will search for as many new 'do no harm' forms of revenue," he said on Twitter. "IE, The EU, broadly, will look at taxes until they get their pound of flesh from any company operating there."