After years of speculation, the U.S. government is moving forward with legislation that potentially bans TikTok, the popular short-form video social media platform owned by Chinese company ByteDance.
TikTok has roughly 150 million monthly active users in the United States, and the app is especially popular among younger users. The privately owned company generates billions in revenue and is one of the fastest-growing internet companies worldwide.
TikTok being forced to stop working for U.S. users would shake up the country's consumer entertainment and social media landscape, leaving a gaping hole in consumer and advertiser demand. The proposed legislation and its implications have left many -- including TikTok management -- confused about what might actually happen if it becomes law. Here some facts about the proposed legislation and the two Magnificient Seven stocks that stand to benefit if the Chinese application stops operating in the United States.
Not a ban but a forced TikTok divestiture
With minimal forewarning, the U.S. House of Representatives voted on a bill last week related to TikTok. It passed with heavy bipartisan support (352 to 65), and it called for China-based ByteDance to sell its U.S. operations to a domestic owner. The bill's supporters say they are worried that the Chinese Communist Party has inappropriate influence on ByteDance and can order it to initiate actions that could impact U.S. users (including attempts to affect their political beliefs). They worry that the social media app is under the control of a foreign adversary, making it a national security threat. The bill demands ByteDance divest its U.S. operations within six months. If it doesn't the TikTok app will be banned from operating in the country.
To take effect, the bill still needs to pass the U.S. Senate and get approval from President Joe Biden. The Senate is debating the bill currently and might eventually pass an adjusted version of it. President Biden has said he would sign the bill into law if it comes to his desk for signature. While it's not a done deal, it seems likely that some form of the bill regulating TikTok will eventually become law (although some suspect it won't happen before the November election).
Representatives of the company and bill detractors claim the legislation "bans" TikTok. The company even sent out push notifications to users urging them to call their local representatives to oppose the measure. What the actual bill calls for is more nuanced. The bill calls for ByteDance to separate its U.S. operations and sell this part of the business to a U.S. owner. Only if it refuses to divest the TikTok app -- potentially throwing away over $100 billion in value -- will it be banned in the U.S.
While the bill's merits are debated, investors might want to consider which companies could benefit financially if TikTok ends up being banned (because ByteDance refuses to divest to a U.S.-based owner). Two companies I know will benefit are Meta Platforms (META 0.43%) and Alphabet (GOOG 9.96%).
Meta Platforms: Here comes Instagram
If TikTok gets banned, the clear winners are its direct competitors. One is Meta Platforms, owner of social media apps Facebook, Instagram, and WhatsApp.
Instagram competes fiercely with TikTok. It even went so far as to build its own TikTok clone called Instagram Reels to try and retain users who were leaving for TikTok. Reels seems to be helping as TikTok's user growth has leveled off somewhat since Reels launched.
But TikTok still has 150 million monthly active users in the United States, with young people spending tons of time on the application every day. That's time that could be spent on Instagram. Without TikTok, some of those users will turn to Instagram Reels instead, with advertising dollars following along.
Analysts estimate that TikTok generated $6.2 billion in revenue for ByteDance in the United States in 2023, with projections for rapid growth over the next few years. Add that revenue to Meta's $134.9 billion in 2023 revenue, and the company could see its sales jump by 5% in 2024, just by absorbing TikTok's revenue.
The numbers are unlikely to work out exactly like this. But it's a good illustration of how impactful a TikTok exit in the United States could be for Meta's business.
Alphabet: Widening the YouTube moat
Another likely alternative for TikTok user time is Alphabet's YouTube. The leading video platform worldwide has its own TikTok competitor called YouTube Shorts, which now gets over 50 billion daily views. Without TikTok, many TikTok creators will likely end up posting more on YouTube, and users and advertisers will follow in a similar story to Instagram.
YouTube pulled in $9.2 billion in advertising revenue last quarter, which is nearly 11% of the $86.3 billion in revenue generated by its parent company Alphabet. With no TikTok around, Alphabet's income statement might see a small bump, but it would likely secure the dominance of the fast-growing YouTube subsidiary. Without TikTok, there are very few competitors for YouTube in online video advertising. The only serious competitor is Instagram, although one could argue that streaming services like Netflix could win some portion of the advertising dollars as well.
Removing TikTok from the U.S. would increase YouTube's durability, growing its runway over the next decade and beyond. This should help Alphabet's revenue keep growing, even as its core Google Search business matures.
Overall, TikTok leaving the United States should benefit Alphabet's digital advertising, video, and social media competitors. It would be fantastic news for a lot of consumer internet businesses, but the two most important would be Meta Platforms and Alphabet.
