What the Inflation Reduction Act Means for Big Tech
Democrats were all smiles on Monday as they announced a new climate and healthcare bill. Tech investors should smile, too, although it’s not for what you might think.
Politicians from both sides of the aisle have been pushing for a proposed new bill that would have barred Big Tech companies from prioritizing their own services.
Now, that legislation will not get a vote until the fall, if ever.
It’s especially good news for Alphabet (GOOGL) shareholders.
The American Innovation and Choice Act threatened to break up Big Tech. The bipartisan legislation took aim at Apple (AAPL), Amazon.com (AMZN), Alphabet and Meta Platforms (META). If it had passed, it would’ve made it much more difficult for those firms to leverage their digital ecosystems.
Apple would have been barred from bundling Apple Music with Apple TV+, and Amazon.com would have been prohibited from promoting its private label products in its online store.
The Big Tech companies cried foul and made arguments that under the legislation, their products would somehow be less secure and inconvenient for customers.
Nonetheless, the politicos pushed hard. Amy Klobuchar (D-MN) and Charles Grassley (R-IA) sponsored the legislation. Supporters included everyone from Dick Durbin (D-IL) to Josh Hawley (R-MO).
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Long speeches about Big Tech trampling workers’ rights or stifling the voices of conservatives became common. The bill was going to pass, to the detriment of Big Tech.
Then, the Inflation Reduction Act happened.
The $740 billion bill increases taxes on large corporations while addressing climate change and lowering prescription costs.
Firms earning in excess of $1 billion in profits will get a minimum 15% tax bill. And the legislation provides $80 billion in additional funding for the IRS to go after high-income earners.
Affordable Care Act subsidies will be extended, costing $98 billion. Medicare will now be able to negotiate with pharmaceutical companies over the prices for prescription drugs. And the bill allocates a cool $370 billion to clean energy, including new $7,500 tax credits for electric vehicle buyers.
Here’s an estimate of how this bill could affect the U.S. economy:
The Internal Revenue Service didn’t get a single Republican vote. More importantly, its passing postpones the American Innovation and Online Choice Act until the fall, when it’s unlikely to pass in the present format. Republicans will not give Democrats another political win heading into the mid-term elections, according to analysis at Axios.
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But this is all good news for Alphabet, which had the most to lose from the American Innovation and Choice Act.
That’s because all of its businesses are interrelated. In 2015, the company added Ruth Porat as chief financial officer to get in front of a possible breakup. She quickly reorganized the parts of the business into separate firms.
They got CEOs, independent boards of directors and the facility to raise cash. Google, YouTube, Google Cloud, DeepMind and the other bets blossomed in response.
Alphabet shares during 2022 have been in a bit of a funk. Bears say that digital advertising is vulnerable to the ebbs and flows of the global economy. This is true. Digital ad spending now represents 67% of total ad spend, up from 53.4% in 2019. If overall spending slows, digital ads will be impacted, as well.
The point the bears miss is that the future of all advertising will involve digital ads.
Alphabet is the dominant player in digital ads. It has the best properties, the strongest technology and the ability to unilaterally set standards. Moreover, the business has been reorganized in the event that it’s broken up in the future.
The stock has resistance at $130 as traders grapple with the 200-day moving average.
In their rush to pass new tax and spending legislation ahead of the midterms, Democrats probably saved Big Tech. Longer-term investors should get out in front of the benefit and consider buying shares into any weakness.
If you want my specific picks in tech, check out my service, The Power Elite. Members of this service are currently sitting on open gains of around 160%, 145% and 162%!
Best wishes,
Jon D. Markman
