TikTok is one of the world's most popular social media platforms, but it's also controversial because it's owned by the Chinese tech giant ByteDance. Its critics claim that as long as ByteDance is subservient to the Chinese government, TikTok can be used as a powerful tool for gathering data on its overseas users and swaying public opinion.
Three years ago, the Trump administration proposed to either ban TikTok or force it to sell its U.S. subsidiary to an American company. Those efforts were halted by a preliminary injunction filed by TikTok, remained in limbo as the Biden administration took over, but were recently revived again with bipartisan support.
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It's unclear if this new push will succeed, since it will likely face stiff resistance from TikTok's 150 million U.S. users, its content creators, and the businesses that advertise on the platform. But if TikTok is actually banned, two beaten-down social media stocks -- Snap (SNAP -1.03%) and Meta Platforms (META -1.24%) -- will likely surge on the news.
1. Snap
Snap's Snapchat was once the top social media app for U.S. teens. But according to Piper Sandler's semiannual "Taking Stock with Teens" surveys, it lost that crown to TikTok last year. In the latest results from last fall, 38% of those teens chose TikTok as their top social media platform, compared to 30% who chose Snapchat and 20% who picked Meta's Instagram.
Snap was so concerned about TikTok's growth that it launched a similar short video feature called Spotlight in late 2020. It tried to attract more content creators to Spotlight with generous bonuses, but it still failed to curb TikTok's growth.
The intense competition, along with Apple's privacy update on iOS and macro headwinds for the advertising sector, caused Snap's growth to cool off. Its revenue only rose 12% to $4.6 billion in 2022, compared to its 64% growth in 2021, as its net loss nearly tripled to $1.4 billion.
In 2023, analysts expect its revenue to rise just 2% as it narrows its net loss to $1.1 billion. That slowdown is disappointing, but Snap still served 375 million daily active users at the end of 2022, it continues to gain new users, and its stock trades at just 4 times this year's sales. Therefore, any good news -- like a ban on TikTok -- might lift its stock.
2. Meta Platforms
Meta's family of apps -- Facebook, Messenger, Instagram, and WhatsApp -- collectively served 3.74 billion people monthly at the end of 2022. But like Snap, its growth also stalled out as it grappled with Apple's iOS changes, competition from TikTok, and the broader slowdown of the advertising sector.
But unlike Snap, Meta continued to pour billions of dollars into its unprofitable Reality Labs business, which houses its virtual and augmented reality products, as the growth of its core advertising business cooled off.
Meta's revenue declined 1% to $166.6 billion in 2022, compared to its 37% growth in 2021, as its net income plunged 41% to $23.2 billion. In 2023, analysts expect its revenue and net income to rise 5% and 11%, respectively, as it stabilizes its advertising business and implements more aggressive cost-cutting measures.
As for TikTok, Meta believes it can catch up with Reels, a similar short video platform that was launched on Instagram in 2020 and Facebook in 2021. During Meta's latest conference call, CEO Mark Zuckerberg said that its total Reels played "across Facebook and Instagram have more than doubled over the last year, while the social component of people resharing Reels has grown even faster and has more than doubled on both apps in just the last six months." Therefore, a ban on TikTok could light a fire under Reels and convince more investors that Meta is actually a bargain at 20 times forward earnings.
But investors should mind the longer-term challenges
Snap and Meta will inevitably attract more bulls if TikTok is banned, but those gains might be short-lived if they don't overcome their iOS issues and macro challenges.
Additionally, Snap still needs to streamline its business and narrow its losses, while Meta's unprofitable Reality Labs division will be closely scrutinized this year if its VR and AR products don't attract more users. Investors should carefully review those challenges before assuming that a ban on TikTok will instantly make either stock worth buying again.
