Attacks On TikTok Bring Surprising Upside For Snap

Addressable markets are being cut in half, then cut in half again. Division is killing progress, in politics, business and especially technology. Yet there are winners. Here is one.

Bob Lefsetz wrote this week about Trevor Noah wanting to quit his late-night Comedy Network TV show because it was hindering his career. Lefsetz makes the point that mass media is fantasy. Real success is in the niches.

Investors should consider buying Snap Inc. (SNAP). Let me explain.

Snap is in the midst of a terrible predicament. The youth-oriented social media company depends almost entirely on digital advertising sales, however in 2019 executives decided to work with Apple (AAPL) to stiffen privacy. The alliance hit all of the correct notes with technology writers who worried that Alphabet (GOOGL) and Meta Platforms (META) were becoming too powerful. However, for Snap shareholders it was always a bad idea.

Then Apple in 2021 changed its mobile operating system. The alteration made it difficult for Snap to sell advertising inventory across iPhones and iPads. Sales plummeted and the stock price followed, declining 77% in 2022 alone. Oh, then Bloomberg reported that Apple is stepping up its digital ad business, becoming a competitor.

There is far too much hyperventilating about digital ads. Analysts, and investors seem to believe that online advertising has peaked. That’s not so. In the future, nearly all ads will be digital.

Analysts at eMarketer expect that by 2025 the digital ad market in the United States will exceed $300 billion, comprising 75% of all media spending.

This trend is not going to be reversed, TV networks are bleeding customers. Everything is on demand, where the eyeballs are. Even live sports are moving in that direction. Amazon.com (AMZN) is now the sole distributor of Thursday Night Football, and Apple has a deal to broadcast Major League Baseball.

Mass is fantasy. There is no there, there.

Late-night TV audiences are minuscule compared to on demand social media views, or the financial rewards for servicing motivated niche markets. Trevor Noah is right to want out of late-night TV show. There is no money, or fame there.

TV executives correctly blame TikTok, a Chinese-owned social media company that has become the most downloaded mobile application for the last two years running. Lefsetz says TikTok is the heartbeat of America.

The rise of short form video platform has everything to do with its addictive algorithm. The application analyzes what individual users watch, for how long, and then it serves up an endless queue of personalized, related videos. Users are captivated, often watching for hours at a time.

Captivated users, tens of millions of them, can be manipulated with divisive content, or disinformation campaigns.

Fears that the Chinese government might weaponize TikTok led President Trump to sign an executive order insisting that Bytedance sell TikTok’s American operations to a firm located in the United States. That order was replaced in 2021 with an new order from President Biden.

TikTok is currently banned by the Army and Navy. And several bills are circulating in Washington that would ban the mobile app in the U.S. outright.

A TikTok ban is a big opportunity for Snap.

The Santa Monica, Calif.-based company is currently being ravaged by declining engagement and ad sales growth as its members flee to TikTok. Shares skidded 39% in July following the release of disappointing second quarter results.

The political divide between the United States and China is escalating. The Biden Administration in August asked Nvidia (NVDA) and Advanced Micro Devices (AMD) to stop selling state-of-the-art processors needed for artificial intelligence to Chinese companies. CNN Business reports that the fear is China will use AI to develop weapons against the U.S.

TikTok can be weaponized, and its niche business has become foundational in American culture. Restrictions to its distribution, or algorithm seem inevitable.

In a world where TikTok is limited, Snap shares look cheap.

At a share price $10.82, the stock is down 87% from its record high at $83.34. Snap shares could easily rebound to $22.40, a gain of 107% from current levels.

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