On April 24, 2024, President Biden signed H.R. 815 into law, providing $95.3 billion in foreign aid to Israel, Ukraine, and the Indo-Pacific region. As part of that new law, ByteDance's social media platform TikTok will be banned on Jan. 15, 2025 unless its Beijing-based parent company divests the U.S. subsidiary to an American owner.
That decision was widely seen as a major victory for Meta Platforms (META -1.72%), which owns Facebook, Messenger, Instagram, and WhatsApp. TikTok had emerged as a major threat to Meta's social media platforms over the past few years, and Meta had been aggressively expanding its own Reels short video platform to keep up.
However, the TikTok ban could also help Meta's rival Alphabet (GOOG 0.36%) (GOOGL 0.29%), the parent company of Google and YouTube. Let's see how TikTok challenged Alphabet -- and how a ban would remove those competitive threats.
Image source: Getty Images.
Why did TikTok grow so rapidly?
TikTok has over 1.5 billion monthly active users (MAUs) worldwide. That makes it the world's fifth-largest social media platform after Facebook (3 billion MAUs), YouTube (2.5 billion MAUs), WhatsApp (2 billion MAUs), and Instagram (2 billion MAUs). TikTok isn't available in China, even though it's owned by a Chinese company. Its Chinese counterpart is Douyin, a nearly identical app that is heavily censored to comply with China's draconian internet restrictions.
The U.S. is notably TikTok's largest market, with about 148 million MAUs. According to Piper Sandler's latest "Taking Stock with Teens" survey, 35% of U.S. teens chose TikTok as their favorite social media platform, putting it in first place ahead of Instagram (30%) and Snap's Snapchat (22%).
TikTok grew rapidly by carving out a niche in short scrollable videos. It learned its users' viewing habits by analyzing the videos they watched and skipped, and it locked them in by serving up more videos catered to their interests.
How did TikTok challenge Alphabet?
That growth directly threatened YouTube, which generated 10% of Alphabet's total revenue through its ads in its latest quarter. It also competes against YouTube's Premium and Music subscriptions, a major component of Google's subscriptions, platforms, and devices business which generated another 11% of its revenue last quarter.
TikTok's rapid growth drove Google to launch YouTube Shorts, its own platform for short-form vertical videos, in late 2020. During its first-quarter conference call, Google's chief business officer Philipp Schindler said its total number of YouTube channels that uploaded Shorts in 2023 increased 50% year over year, while the monetization rate of Shorts relative to their viewership had "more than doubled" over the past 12 months.
Google's core search engine also faces indirect competition from TikTok, which many younger users are using as a video-driven search engine for various topics and news stories. During a technology conference in July 2022, Google's senior VP Prabhakar Raghavan admitted that nearly 40% of young people were going to "TikTok or Instagram" to look for a "place for lunch" instead of Google Maps or Search.
Would a TikTok ban make Alphabet's stock a better buy?
Alphabet's revenue only rose 9% in 2023 as its advertising and cloud businesses faced tough macroeconomic and competitive headwinds. But in the first quarter of 2024, Alphabet's revenue grew 15% year over year as its core businesses bounced back. Google's total ad revenue rose 13%, driven by YouTube's 21% ad growth and a 14% increase in Google's "search and other" ad sales. The growth of those two larger businesses offset its declining advertising network revenue.
Alphabet achieved that recovery even though TikTok wasn't banned. Therefore, a ban on TikTok might drive more users to YouTube Shorts in the U.S., but it probably won't significantly boost its near-term ad sales. Moreover, a ban would only shut off TikTok in the U.S., and this market accounted for less than half of Alphabet's total revenue last quarter.
A ban on TikTok would certainly make Alphabet's stock a little bit more appealing by removing one of its top domestic competitors, but investors shouldn't expect it to light a raging fire under its YouTube and search-based advertising businesses.
Instead, investors should focus on the accelerating growth of Alphabet's advertising and cloud computing businesses, its new $70 billion buyback plan, and its first-ever dividend. Those positive developments suggest it could easily beat analysts' expectations for 11% revenue growth and 18% earnings growth this year -- and its stock still looks reasonably valued at 25 times forward earnings.
Simply put, I believe Alphabet's stock is still a compelling buy regardless of what happens to TikTok next January.
