TikTok Bans Are Gathering Momentum In The US
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Summary: TikTok bans are gathering momentum in the US following the EU parliament's decision to ban TikTok use across three EU institutions and recommending EU staff to delete the app on their personal devices due to cybersecurity issues. US social media stocks responded positively to this news with Snap shares gaining 9.5% as this social media platform has the youngest user base and thus would likely see the most increased engagement if TikTok sees demand dropping from these bans and recommendations.
TikTok bans gather momentum
Yesterday’s session saw significant interest in US social media stocks as the US is set to follow the EU in banning some foreign technology companies including the popular TikTok app which is delivered by the Chinese-based ByteDance. The concerns driving this legislation are whether US user data could be accessed by the Chinese intelligence agencies. Last Tuesday, the EU parliament banned TikTok from its staff devices due to cybersecurity issues and is now banned across three major EU institutions and the EU parliament also put out a “strongly recommended” notice to all staff of deleting the TikTok app from their personal devices. The nervousness over data breaches is not a one-way street as Chinese authorities urged a couple of weeks ago state-owned enterprises to phase out using the big four accounting firms, which all from Western countries, driven by concerns of data security. These bilateral moves underscore the decoupling between China and Western countries across several key technologies.
Snap gained the most on upcoming US legislation bill
The upcoming bill legislating foreign technology caused US social media stocks to rally yesterday with Snap (+9.5%) gaining the most with the three other social media stocks were mixed; Meta (-0.2%), Alphabet (+1.6%), and (+1.1%). The reason for why Snap reacted the most positively is that TikTok is heavily used by young people which is also the target of Snap and if parents get more aware of the potential cybersecurity issues then usage of TikTok might switch to Snap. Google’s YouTube is another social media platform that could see a positive effect from TikTok bans. While social media stocks got a boost yesterday the 5-year performance across these companies has been below the overall equity market except for Alphabet highlighting an industry that has lost its growth dynamics and interest of investors.
Social media equity valuations are historically low
The hangover from the pandemic boom has drastically impact equity returns and equity valuations since the peak with the most dramatic change observed in Snap shares with the 2-year forward EV/sales ratio falling from just above 18x at the peak to around 3x today. Investors are paying significantly less for revenue and revenue growth among social media stocks. One thing is that TikTok dramatically changed the social media landscape in the US and Europe, but Apple’s data privacy changes also impacted online advertising prices because tracking got more difficult. With energy crisis, surging commodity prices, reshoring, the US CHIPS Act, and the war in Ukraine it seems investors are most interested in companies and themes that are thriving on the comeback of the physical world.
