These 4 Stocks Are Breaking The Market

Amazon. Apple. Facebook. Google. These companies and their products are everywhere, every moment of our lives, from the second we wake ("Alexa, lights on!") to the Facebook feeds we check right before sleep.

If that doesn't frighten you, it should, argues Scott Galloway.

The premise of Galloway's new book, "The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google" is that Amazon, Apple, Facebook and Google have become so large, so influential, that they're allowed to play by totally different rules than everybody else.

With a combined market capitalization that exceeds the GDP of India, the “Four Horsemen,” as Galloway calls them, exert never-before-seen influence over our markets and our society—and somehow, we love them for it.

Galloway is a serial entrepreneur, a YouTube superstar and digital marketing professor at the New York University's Stern School of Business. He will give the keynote presentation at the 2^nd Annual Evidence Based Investing conference, Nov. 2, put on by IMN and Ritholtz Wealth Management.

ETF.com: What is it about Amazon, Apple, Google and Facebook that made them the mega-giants they are today?

Scott Galloway: Each company speaks to a specific human instinct. Google speaks to our hard-wired need for a divine authority to ease our suffering. Facebooks taps into our need to establish connections, to love and be loved. Amazon is our consumptive gut; you may have a hundred times more than what you need, but you'll still always want more.

And Apple, I think, plays to our instinct to procreate. Expensive Apple [products] signal that you have good genes: that you're part of the innovation class, that you're smarter, richer, better educated and so on.

Tapping into these instincts has enabled these four companies to scale much bigger and faster than anybody else.

ETF.com: In your book, you argue that the four get special treatment over other companies. How so?

Galloway: Just look at Facebook. If your firm had been weaponized by Russia, you'd be the subject of lots of scrutiny. You'd probably be out of business. But Facebook says, “Oh, we're so successful, and it’s such a big problem, you can’t really expect us to figure this out," and society just buys right into it.

The New York Times, with its $90 million in cash flow, has figured out how not to be weaponized by the GRU [the main military foreign-intelligence service of the Russian Federation], yet somehow Facebook with $12 billion can’t figure it out.

Or take Google. Google controls 90%-plus of search, a market share that's bigger than the entire advertising market of any nation, with the exception of the U.S. But it’s not regulated.

Google has greater concentration of power than the railroads did when they were broken up. We treat these companies by a different rulebook.

ETF.com: Why do we do that?

Galloway: Because, as a society, we no longer worship at the altars of kindness and character; we worship at the altars of innovation and shareholder value. Largely, the most revered people in the world right now are the wealthiest—and not [those with] self-inherited wealth, but wealth through innovation, through technology.

This has created a kind of a fanaticism or zealotry that allows these companies to get away with things other companies can’t. They’re not subject to the same scrutiny that other businesses have to endure, and there are very few laws regulating them.

And it's not their fault; it's our fault.

These companies are doing exactly what they’re supposed to be doing. They're weapons of capitalism, here to create economic security for their employees and shareholders. But we elect officials who lack the backbone to go after these companies, when they abuse their incredible successes.

ETF.com: With so little appetite in Washington for regulation currently, will we have to wait until the political climate shifts significantly to see the four held to greater accountability?

Galloway: You could potentially see regulation coming out of the states. These companies have been a great deal for New York, Boston, San Francisco. But the flyover states have gotten the **** kicked out of them.

So you might see a state district attorney who decides the fastest path to the governor’s mansion is to create a populist movement and go after one or more of these companies. It could be like tobacco, where it’s not the federal government that goes after them, but individual states.

In terms of Washington, though, you'll have some huffing and puffing; there will be some truth in advertising legislation, maybe. But right now the White House doesn’t have the will or the collective IQ to go after big tech.

Where the war against them will break out, I think, is where all the biggest wars of the last century have broken out: Europe.

ETF.com: Why Europe, specifically?

Galloway: Europe registers all the downsides—the privacy concerns, the anti-competitive behavior and so on—with a fraction of the upside. These companies have taken advantage of their size to pull a shell game, such that they pay very little tax. This has stiffened the backbone of EU regulators.

[European Commissioner for Competition] Margrethe Vestager is going to go after these firms, and I think you'll see your first $10 billion fine come out of Europe. Actually, I think there's a 1-in-3, maybe 1-in-2 chance that a small European nation outright bans one or more of these companies in the next few years.

ETF.com: Bans them!?

Galloway: It seems unthinkable. But look at Italy. Look at what happened to Italy’s ad agencies, its newspapers, its big employers when Google showed up. Now that those companies are a shadow of themselves, Italy's tax base has gone down, and it’s been bad for employment.

Compare that to China, who let those companies in just long enough to steal their IP, then propped up a local competitor with the support of the government and captured all the value for themselves. It’s illegal, totally counter to Western treaties, to capitalism, to everything … but who is better off, Italy or China?

So I think a few small nations are just going to say, “We’ll go the route of China and start our own search engine."

Ultimately, though, we're going to have to have this difficult argument over whether what is good for the consumer is always good for society.

ETF.com: All four horsemen are American companies. Any chance there could be a fifth horseman lurking outside America? In China, maybe?

Galloway: I don’t think Chinese companies are very good at building global brands. Name a great Chinese global brand.

ETF.com: Alibaba?

Galloway: Alibaba is a corporate brand. Do you in any way consume or interact with Alibaba’s products?

ETF.com: Touche.

Galloway: It's just not in the same league. China is incredibly weak at building great brands beyond their borders, so I don’t think competition’s going to come from China. They've even started to scale back their ambitions in the U.S., because they see what a fairly xenophobic culture we are right now. They’ll invest in India before they invest in the U.S.

The potential fifths could be companies like Airbnb or Uber, though the one that's really kicking *** and taking names right now is Netflix. It’s become the most dominant operating system of the second-most- important screen in our lives: the television.

ETF.com: You once argued Apple would be the first of the four to hit the $1 trillion valuation mark. Do you still believe that?

Galloway: No. The first will be Amazon.

ETF.com: Why Amazon over Apple?

Galloway: Look at where Amazon's [business] bumps up against any other company, and you'll see Amazon winning.

Look at voice. Five years ago, Apple, with Siri, owned voice. Now, Amazon, with Alexa, has 70% share of voice in the home.

Or look at streaming media. In 2015, Amazon was the seventh-largest in market share, in terms of hours streamed during prime time; by 2016, it was third. They’re now the second-largest spender on original content, just behind Netflix, which increased their budget $2 billion when they heard Amazon’s steps behind them.

Amazon has so much credibility that it could announce tomorrow they’re getting into hospitals, and we'd take down the stock price of every other hospital company.

ETF.com: Didn't we sort of see that happen when Amazon floated the idea of getting into the pharmacy business? The stocks of CVS and Walgreens sunk a few percentage points overnight just from rumor alone.

Galloway: Exactly. Amazon can perform Jedi mind tricks. It can take any consumer stock down 10-30% in 30 days just with press releases. Between the time Amazon announced its acquisition of Whole Foods and when the market closed that same day, the value of Kroger, the largest grocer in America, declined by a third. Kroger shed a third of its value, simply because Amazon acquired a company one-eleventh its size!

I think we're headed to what I call the "Amazon singularity": If a stock moves a lot in one day, it’s not because of interest rates or earnings, it’s because of what Amazon is or isn’t doing.

ETF.com: If Amazon (and to a lesser extent, Facebook, Apple and Google) can make or break markets with a single press release, how do we even ensure a fair economy anymore?

Galloway: Well, the wonderful thing about markets, and one of the keys to regulation, is the general belief that markets shouldn’t be controlled by any one company. We protect the little guy. We try to create a level playing field, such that the little guy has a fighting shot.