The Curious Case of the Government Versus The Internet

As President Trump takes aim at social media companies in the U.S., Wall Street remains cautious on what big changes are coming to tech stocks

Just as the U.S. economy reels from the impact of 2.1 million more jobless claims, it appears that the powers that be are coming for the internet and its chief antagonist: social media. 

On Thursday, President Trump passed an executive order against social media platforms which opens them up to federal scrutiny. The move comes after Twitter (NYSE: TWTR) attached a warning to some of President Trump’s tweets for the first time on Tuesday, prompting readers to fact check his claims. The president accused U.S. social media sites of stifling conservative voices and even threatened to shut them down, taking particular aim at Twitter, Facebook (NASDAQ: FB), and Google-owned (NASDAQ: GOOG) YouTube.

Trump seems intent on waging a war against social media, and this order certainly represents their biggest threat in a long time, possibly ever. 

What does this executive order mean?

Despite Microsoft’s (NASDAQ: MSFT) often-forgotten attempts to monopolize the world wide web back in the ’90s, the internet has grown to become a massive beast. In the U.S., Section 230 of the Communications Decency Act has played a pivotal role in maintaining some semblance of order. 

President Trump is going after this act, which has granted social media companies near-unlimited autonomy in the policing of their own platforms while steering clear of liability for damages caused by what users may post on these sites. In other words, you can’t sue Twitter for banning (or not banning) certain accounts — not that many haven’t tried. 

Often regarded as the most important law on the internet, President Trump’s new executive order would see the Federal Communications Commission (FCC) review Section 230 and regulations regarding the policing of online content. Basically, the FCC will now decide whether tech platforms are allowed to have the legal protections that form the basis of their business models, and if they want to fact check certain high-profile users, they might now forfeit those protections. If that is what the review concludes, social media giants could be responsible for what their users post and open to legal action if it falls afoul of the laws of the land.

The social media reaction

Twitter CEO Jack Dorsey — who also runs Square (NYSE: SQ) — said that he stands by his company’s decision to fact-check two tweets by President Trump, while Facebook CEO Mark Zuckerberg criticized Dorsey’s stance, stating that social media “shouldn’t be the arbiter of truth of everything that people say online”.

Regardless of how the sparring CEOs feel, Wall Street is none-too-happy about how these events are unfolding, with Twitter and Facebook stock falling 4.4% and 1.6% respectively yesterday.

This week has already turned the ‘new status quo’ all topsy turvy — travel stocks such as Delta (NYSE: DAL) and TripAdvisor (NASDAQ: TRIP) are rising while stay-at-home stocks like Netflix (NASDAQ: NFLX) and Zoom (NASDAQ: ZM) fall. 

Facebook, Google, and Twitter have found themselves in the latter camp until now, benefiting greatly from increased usage as people self-isolate. A war with the President could undermine all the gains these companies have made this year; Facebook and Google have risen 7.5% and 3.6% YTD respectively, versus the S&P 500’s (NYSEARCA: VOO) 6.6% decline.

It’s good news for the kindly little brothers of the group, Pinterest (NYSE: PINS) and Snapchat (NYSE: SNAP), as the pioneers of the ‘mood board’ and ‘story’ saw each other’s stock rise 3.6% and 7% respectively on yesterday’s order. Perhaps this is because these are totally different social platforms that do not have the same liability in regards to what their users post. 

Should you still invest in social media stocks? 

There are already analysts labeling Twitter stock as a ‘buy’ due to the President’s actions. As the story unfolds, however, Twitter’s share price could be in for more volatility in the days and weeks ahead; the same being said for the likes of Facebook and Google. 

The likely reality though is that none of these giants are going anywhere and although they may be subject to stricter regulation, that is no bad thing for consumers who might find themselves more willing to use the sites. All this aside, Twitter is a massive part of President Trump’s persona, a medium through which he engages with his supporters, and which he has professed to love in the past. With the coronavirus all-but ending any hopes of presidential campaign rallies this year, social media is a vital and viral way for Trump to get his supporters excited to vote. He needs them too much.

And then there is the fact that Facebook and Google are so much more than content and user regulation. While YouTube may be subject to scrutiny under the new legislation, this represents but a fraction of Google’s revenue. Then there is Facebook’s recent move into the e-commerce space through a strategic partnership with Amazon (NASDAQ: AMZN) rival Shopify (NYSE: SHOP). The move has the potential to be Facebook’s biggest pivot to date, should they pull it off, and could see ‘the social network’ and its almost 3 billion user base become the largest e-commerce platform on the planet.

There is a long way to go before this story reaches a conclusion, but it’s hard to see the social media giants going quietly into the night with this one.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.