TikTok...Time to Buy Meta

It looks like time has run out for TikTok. Add another clock/time pun to your reading on this week’s TikTok fiasco.

I have a solid two-pronged investment thesis here. But first, I want to quickly rehash the timeline that led to the bill passing this week forcing ByteDance (Parent Company) to sell TikTok or face a ban.

If you don’t know what TikTok is, consider yourself lucky and move on.

• 2016-2017: ByteDance launched TikTok internationally in 2017, following the 2016 launch of Douyin, its counterpart for the Chinese market.

• August 2018: Concerns about TikTok's data privacy practices begin to emerge, particularly regarding its potential to send data to China.

• January 2020: The U.S. Army bans TikTok from military devices.

• August 2020: President Donald Trump issued executive orders that banned transactions with ByteDance, aiming to force TikTok to divest its U.S. operations.

• September 2020: TikTok announces a tentative deal with Oracle and Walmart to create a new U.S.-based entity, TikTok Global, to address these security concerns and avoid a ban. Remember that?!

• June 2021: President Joe Biden signed an executive order revoking the Trump-era bans and ordered a new Commerce Department review of software applications tied to foreign adversaries, including TikTok.

• 2022 - 2023: Escalating scrutiny over TikTok's data security practices and ties to China.

• Early 2024: Bipartisan concerns in the U.S. Congress led to new legislation forcing ByteDance to divest TikTok.

• March 14, 2024: The U.S. House of Representatives passed a bill requiring ByteDance to sell TikTok or face a ban, emphasizing national security concerns over data privacy.

The arguments coming back from China/TikTok that this is “bullying” are laughable. China has banned Google, Youtube, X, Whatsapp, Instagram, Netflix, Reddit, Twitch, LinkedIn, Pinterest, and Facebook. This thing should be shut down…

While the bill still has to advance through the Senate, and there are a lot of unknowns, my idea here is that Meta is starting to look really good for two reasons. The first one is IF TikTok gets banned, the second one doesn’t care:

1) Migration to Reels: Instagram (owned by Meta) has this thing called Reels. Meta pulled their typical response to competition and hit ctrl+c and ctrl+v, copying TikTok’s exact product to their platform. We’re seeing impressive engagement metrics at Reels, as usage has increased by 57.4% in one year. 91% of Instagram users watch videos on the platform at least once a week. Banning TikTok would flip everyone to Reels, as 87% of Gen Z view them as the same product. More importantly, Ad dollars would migrate to Reels. Here is a chart of videos posted monthly by significant brands; the gap between Reels and TikTok continues to narrow.

2) The Decline of Search: I don’t know about you, but I’ve been using Perplexity or ChatGPT lately instead of Google. The marketing behind Perplexity is genius. Instead of a “Search Engine,” it is an “Answer Engine” where you can get a direct response to your query instead of 10 blue links. It might not happen all at once, but the dominance of Google in search will surely erode. Even if Google’s search product captures migration from traditional web search, the monetization model will forever be changed. Where do you think those ad dollars are going to go? One of the only games left in town is Meta.

Meta is also coming off a solid quarter in which revenue growth is back, baby!

The US is so focused on anti-monopoly measures right now that there is an approximately zero percent chance that one of the other large tech companies will be able to buy TikTok. If the bill gets through the Senate, you end up with a potential suboptimal suitor who buys the asset. This, ironically, will create a more monopolistic ad market that benefits Meta.

Do you think that Walmart and Oracle will prevent user churn on TikTok vs. Reels, which EIGHTY-SEVEN PERCENT of Gen Z believes is the same thing? Good luck with that.

So we’ve got a likely weakening if not demise, of Adspend on TikTok (should the bill pass). We’ve also eroded the unit economics on Google AdSense due to Answer Engines. WHERE ELSE ARE ADVERTISERS GOING TO GO? Superbowl commercials can only happen once a year, but Meta is forever (for now…).

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Cheers,

The GRIT Alpha Team

The author of this newsletter owns a long position in Meta (META) in the fund they manage. There is no guarantee that the author will maintain such a position in the future.

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