If one thing was clear from Facebook founder Mark Zuckerberg‘s testimony on Capitol Hill last week it was that the regulators are coming.
For investors, that means it could be time to take action.
Regulation and reclassification are two significant threats that could pressure Facebook and its peers, according to a research note from David Kostin, chief U.S. equity strategist at Goldman Sachs.
Zuckerberg’s testimony “raised investor concerns about the potential for government regulation of the use of consumer data,” he wrote. “The Zuckerberg hearing revealed to many government officials the scale of personal data that FB users had agreed to allow the firm to gather, raising regulatory risks. “
In addition to the regulatory challenges, Facebook and similar companies are about to get reclassified by major indexes like the S&P and MSCI families. They’ll be part of a new sector called “communications services” and no longer will be part of information technology. The new sector will take the place of telecommunications services.
What will be left is what Kostin described as “legacy tech” — and it could present a better opportunity for investors after the big media names are carved out.
“The future ‘legacy’ Tech (i.e., firms remaining in the sector) will have much slower expected sales and earnings growth and lower margins than both the current Tech sector and the new Communication Services sector,” he said. “However, the ‘legacy’ Tech sector trades at a lower valuation.”
In addition, the companies on Goldman’s radar have underperformed the sector and the broader market as they are highly correlated to Facebook. Goldman cites the ever-increasing use of exchange-traded funds as a reason for the stocks being held back, as they are included in indexes with Facebook and thus suffer from its performance. Having the social media giant in a different classification, then, could provide opportunities.
Additional companies likely to be included in the new communications services sector include Disney, Netflix and Google-parent Alphabet, among others.