Why Meta & Alphabet Should Dance on TikTok’s Grave
The U.S. has a TikTok problem … and it’s about to get a lot worse.
Meanwhile, executives at Snap (SNAP) announced on Thursday that sales and profits came in below expectations as the social media company faced competition for advertisement spending. Shares lost 39%.
Investors are focused on financial metrics. That view is too small.
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TikTok is a short-form video platform owned by ByteDance, a Chinese conglomerate. Executives in China claim the businesses operate independently. They say data for TikTok’s American members is stored in Singapore and the U.S., not China. Until a month ago, there was no direct evidence of any personal information ever being accessed by employees based in China.
Buzzfeed News reported last month that this is no longer true.
Leaked audio recordings from 80 internal meetings revealed that Bytedance employees repeatedly accessed nonpublic data from American TikTok users. Data collected from Americans is supposed to be stored on Texas-based servers controlled by Oracle (ORCL), under the Project Texas agreement.
That agreement came out of a 2019 investigation by the Committee on Foreign Investment in the U.S. A CFIUS arrangement in 2020 later moved all TikTok data collected from Americans to Texas. The elephant in the room is the soft power of the Chinese Communist Party. The state has absolute authority over all Chinese firms.
TikTok is currently the most downloaded, fastest-growing social media platform in the world, with 1 billion monthly active users. Domestic policymakers are correct to fear that TikTok is a Trojan horse that may be used by the CCP to influence what Americans see, hear and think.
Therein lies the problem and the potential opportunity for investors.
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The Snap financial results released on Thursday were terrible across the board. Executives blamed flat year-over-year sales growth on the challenging economy and changes made to Apple’s (AAPL) mobile operating system, as well as slowing demand for online ads. However, the real culprit is TikTok.
The two companies compete for the same 15- to 24-year-old demographic. Unfortunately for Snap stakeholders, TikTok is aggressively ramping up its monetization efforts.
TikTok amassed $4 billion in ad sales during 2021, according to a report from eMarketer. Analysts there expect 2022 sales to balloon to $12 billion, more than the combined sales of Snap and Twitter (TWTR).
The evolution is about brands making short form video integral to their marketing strategy. TikTok became the logical winner in 2021 as the CFIUS concerns began to fade.
The big opportunity for investors is those concerns are likely to resurface, especially heading into the 2022 midterm congressional elections.
A story at Politico last week linked embedded Chinese spy gear to hundreds of smaller rural American telecom networks. The maker of that equipment is none other than Huawei.
During 2019, Huawei became a telecom equipment powerhouse. Its prowess in building network equipment and high-quality smartphones made its business bigger than Apple.
Executives at the company based in Shenzhen, China, predicted it was only a matter of time before its handset business superseded even Samsung. That franchise is in ruins today, wrecked by affiliation to the CCP and stories like the Politico rural telecom expose.
In my opinion, the stories about the potential dangers of TikTok will come, too. The business is now too important to American culture and too disruptive to the rest of big tech.
The potential winners of a TikTok takedown are most of the same companies that are now reeling from lost mindshare and market share.
Earnings reports are due this week from Meta Platforms (META) and Alphabet (GOOGL). Longer-term investors should consider looking for opportunities to accumulate shares into larger declines following the release of financial results.
Often, the brightest opportunities arise during the darkest periods. Investors should bet against the continued rise of TikTok.
Best wishes,
Jon D. Markman
P.S. Dr. Martin Weiss and early stage investor Chris Graebe are going on the air to show how staggeringly profitable private market deals can be … and how to get first access to one private deal for Weiss Members. If you’d like more information, check this out.
