TikTok is one of the fastest-growing companies in the world with over 1 billion monthly active users, which makes it only slightly less popular than Instagram with 1.2 billion MAUs. Despite being a private company, data estimates indicate the platform generated $4.6 billion in 2021, up a blistering 142% year over year.
Of course, this rise to fame has come with a price as the company has been a the forefront of controversy. This has been mainly driven by the fact that TikTok is owned by Chinese technology company Bytedance, which has been cause for concern for legilslators given the type of data collected by the service and potential access by the Chinese government. A report by the BBC indicates this could include access to a user's calendar, key strokes, contacts and even SIM card serial number. Therefore, it is no surprise that TikTok has been recently banned on government cell phones by U.S, U.K and even New Zeland authorities.
In the U.S., bipartisan legislation has recently been floated which could result in a ban of the app entirely. The bill, titled the “RESTRICT Act,” aims to give the president (in conjunction with the commerce secretary), new powers to prevent threats from technology products from “adversarial” nations. Along with a number of senators, the White House has also backed the bill with National Security Advisor Jake Sullivan stating it would “strengthen our ability to address discrete risks.” This bill would also apply to foreign technologies from other countries such as Russia, North Korea, Iran, Cuba and Venezuela. TikTok CEO Shou Zi Chew has been called to testify before congress on March 23, thus all eyes will be on how that plays out.
In the meantime, this discussion will look at three stocks that will be impacted (positively or negatively) it the TikTok ban does go into effect.
Oracle
Founded in 1977, Oracle Corp. (ORCL, Financial) is one of the pioneers in the technology industry. Throughout the decades, the company has made a number of notable acquisitions, including Sun Microsystems (which developed the Java programming language), PeopleSoft and Siebel Systems. For many years, Oracle made its revenue through license sales of its various back office software and database solutions. However, the company reinvented its business model recently, with its new business focusing more on providing cloud infrastructure and even health care solutions through its acquisition of Cerner in 2022.
TikTok relationship
As mentioned in the introduction, TikTok has raised a lot of concern regarding its data residency, specifically for U.S. citizens. The company currently houses its U.S citizen data at its center in Virginia, with a back up in Singapore. However, this was not enough to satisfy legislators. As a reult, TikTok announced it plans to drive all of its traffic through U.S.-based servers provided by Oracle. The project aims to go even further by effectively offering a “walled garden” to prevent the transfer of U.S. citizen data to China, with monitoring governed by Oracle. In addition, the company could even be asked to set up a review system for content and algorithm requests, which may be linked to the Chinese government. Therefore, if TikTok does not get banned, it will be effectively squeezed into a lucrative contract with Oracle, which would benefit the company’s revenue and likely the stock price.
This deal would also act as a testament to Oracle's strong position as a cloud provider for organizations with data residency concerns. This could open up a range of future opportunities for the company. For example, in early 2023, Uber (UBER, Financial) selected Oracle as its cloud infrastructure partner.
In another scenario, TikTok may be forced to sell to a U.S. company, with Oracle and even Walmart (WMT, Financial) already floated as potential buyers. If Oracle owned TikTok, this would be immensely lucrative for the company and also ensure a lock in of a major cloud customer.
Financial recap
On March 9, Oracle reported strong financial results for the third quarter of fiscal 2023. Its revenue of $12.4 billion rose by approximately 18% year over year. Its newest business segment (Cloud) drove these solid results with a blistering 48% revenue growth achieved to $4.1 billion.
The company also reported solid growth in its Cerner derived health care revenue, which contributed around $1.5 billion in sales. Given Cerner focuses on digitizing health records, the company has a huge market opportunity, which Ibis indicates could be worth $12.3 billion by 2023.
Moving on to profitability, Oracle reported $1.9 billion in net income, or earnings of 68 cents per share.
Valuation
Oracle trades at a price-sales ratio of 4.77, which is about 6% cheaper than its five-year average.
The GF Value Line also indicates a fair value of around $90 per share and thus the stock is fairly valued at the time of writing based on its historical ratios, past financial performance and analysts' future earnings projections.
Meta Platforms
Meta Platforms Inc. (META, Financial), which owns Facebook, Instragram and WhatsApp, competes fiercely with TikTok. For example, TikTok's short form video content looks to have inspired Instagram to create its “Reels” in order to compete. As Meta has rolled out the feature, it has discovered its advertising rates have been impacted, resulting in lower revenue.
Advertisers are also gradually transitioning advertising dollars from Meta to more alternative platforms such as TikTok, especially those targeting the younger demographic. However, as TikTok has become more popular as a platform, a larger percentage of mainstream advertising dollars is flowing into it.
Given Meta makes the vast majority (97%) of its revenue from advertising, this looks to be impacting the company’s revenue growth substantially.
TikTok is also investing heavily into social e-commerce, an area Meta has aimed to develop with its Instagram Shops. Therefore, this is not just a battle of social media dominance, but potentially the future of online retail.
Therefore, a TikTok ban would take the pressure off Meta from a competition front. As such, I expect a substantial increase in stock price should this occur. Meta Platforms' apps are banned in China, so it would not be crazy for the U.S. to do the same for TikTok.
Financials review
I have covered the financials of Meta extensively in prior posts, so here is a quick review of where we stand as of fourth-quarter 2022. The company reported $32.17 billion in revenue, which declined by 4.5% year over year. I believe this was driven by the aforementioned tepid advertising market, coupled with competition from TikTok (which resulted in lower ad spend) and lower monetization rates from its reels.
As I discussed above, a ban on TikTok should open the door for Meta to focus more on its core feed posts, of which some prominent Instagram celebrities such as Kim Karadasiahn have previously stated they prefer. In an Instagram post, she said to her 349 million followers, “Make Instagram, Instagram again…stop trying to be TikTok.”
This was also part of a Change.org petition, which racked up a staggering 332,589 signatures. Therefore, it is clear that a ban of TikTok would mean Meta can focus more on what its core users want as opposed to trying to “fast follow” with similar features other platforms offer.
Moving onto earnings, the company reported net income of $4.6 billion, which plummeted by 55% year over year. This was mainly driven by lower advertising rates, as Meta’s technology tends to work with an auction-based system for advert delivery and thus, less advertisers mean lower rates.
Meta’s research and development expenses also rose by 39% year over year to $9.7 billion. It is rare for a company to accelerate its investments into R&D, despite declining fundamentals in its core business. However, it is clear Mark Zuckerberg believes investing in the future is the best way to solve any of the company's problems. The company aims to invest between $10 billion to $15 billion per year into the Metaverse, which Zuckerberg believes could become the “next computing platform.”
It is likely a portion of this R&D was dedicated to developing products such as Reels to compete with TikTok. Therefore, a ban of the platform should mean Meta can focus on bolder and more long-term bets.
Moving forward, Meta has guided for between $26 billion and $28.5 billion in revenue for the first quarter of 2023, which would represent a growth rate of just 2% year over year. I believe a ban of TikTok would easily enable this growth rate to increase by around 16% into the second quarter and onward. This is assuming TikTok’s estimated $4.5 billion in revenue for 2021, which was mostly from advertising, flowed to Meta. Of course, this is just an estimate and given TikTok is a private company, it is challenging to calculate the exact impact.
Valuation
Meta trades at a forward price-earnings ratio of 20, which is 14% cheaper than its five-year average. I believe this valuation gap would close if TikTok is banned.
Snap
Snap Inc. (SNAP, Financial), which operates Snapchat, is another company that could potentially benefit from a TikTok ban.
First, Snapchat has historically been popular with the gen Z demographic born between 1997 and 2012. This cohort (and younger) was TikTok’s original target market, and thus a ban of the platform could leave the younger audience with no other option as many of the individuals in this demographic prefer not to be on Facebook, which is seen as a “boomer” platform, and Instagram is more a millennial solution.
In terms of features, Snap has continually innovated and been a pioneer (like TikTok). Its story feature was a master class in user engagement as it effectively removed the social uncertainty regarding a traditional post. On platforms such as Instagram, a user will often filter photos and think carefully before posting. Snapchat stories removed this friction.
Financial review
On the financial front, Snap is having a tough time as the company reported $1.8 billion in revenue for the fourth quarter of 2022, which missed analysts' forecasts by around $8 million and was virtually flat year over year.
Its profitability was not much better with an earnings loss of 18 cents per share, which missed analyst forecasts by 7 cents. Its operating losses also widened from $702 million in 2021 to -$1.2 billion by 2022.
As such, a ban of TikTok would be unlikely to save Snap completely, but it could provide some respite as the younger demographic of users would look for a place to go that is not Facebook or Instagram. Therefore, this could cause a resurgence in advertising revenue over the long term. Snap also benefits from being able to offer alternative and innovative advertising, such as its unique brand-focused filters. The company is also a leader in augmented reality, having previously produced giant dinosaur AR characters. Therefore, the company is poised to benefit from tailwinds surrounding the metaverse if it can continue to grow.
Moving on to the balance sheet, the company reported $3.9 billion in cash and short-term investments. It has total debt of $4.17 billion, of which the majority is long term.
Valuation
In terms of valuation, Snap trades with a price-sales ratio of 3.6, which is cheaper than historic levels.
The GF Value Line indicates a fair value of about $48 per share, which means the stock is undervalued at the time of writing. The stock does warn of a possible value trap, which I believe could be justified (assuming TikTok does not get banned).
Final thoughts
A TikTok ban would send shockwaves through many stocks and companies. While many social media companies would likely benefit from lower competition in if it were to happen, Oracle would be impacted if it does not.
In my personal opinion, I think a ban is unlikely given the negative impact on the consumer as well as the thousands of employees across various TikTok offices in the U.S. However, anything can happen in the political world and thus, all eyes will be on how this situation unfolds.
