Snap Can’t Count on a TikTok Ban to Help It Recover

Snap Inc. shares need more than the talked up possibility of a TikTok ban to recover from a near 70% slump in the past year.

(Bloomberg) — Snap Inc. shares need more than the talked up possibility of a TikTok ban to recover from a near 70% slump in the past year.

TikTok Chief Executive Officer Shou Chew testifies before Congress this week, seeking to head off a US prohibition of the Chinese-owned platform that would provide a timely boost for the Snapchat owner.

TikTok CEO Will Tell Congress China Has No Sway Over US App

While a ban would present the opportunity to grab advertising share, larger social-media peers may be better placed to take advantage in a slowing market where competition for ad dollars is fiercer than ever. And in any case, such an outcome looks a long shot: Eric McNew, portfolio manager at Summit Global Investments, puts the chances of a ban at only 10-15%.

“Snap operates in such a saturated market, and it has such growth headwinds, that to bet on something with long odds like a TikTok ban is incredibly speculative,” said McNew.

“There might be some short-term momentum after a ban,” he said. Still, “once the dust settles, you’ll see people are back to Meta and YouTube, and once this potential catalyst is gone, what’s left?”

Snap fell 0.4% on Wednesday.

To understand the significance to social media firms of TikTok’s position in the US, consider estimates from KeyBanc Capital Markets that a ban would redirect 90 minutes of users’ daily engagement time, and potential ad dollars, toward rival platforms.

For Snap, with 375 million daily active users as of the end of last year, the potential growth opportunity would be greater than for much larger rivals like Meta Platforms Inc., which has nearly 3 billion users in its family of apps.

Snap, and particularly its investors, could use such a boost. The stock’s 68% drop over the past year compares with a 7.7% gain in Pinterest Inc. and a 3.6% decline in Meta, the Facebook parent that has regained Wall Street’s favor in recent months with aggressive cost reductions, including multiple rounds of layoffs that prompted upgrades from both Morgan Stanley and KeyBanc Capital Markets this week.

While Snap cut about a fifth of its workforce last year, caution remains high. Fewer than 20% of analysts recommend buying the stock, having slashed estimates for earnings and revenue over the past three months.

Their wariness recognizes both the impact on ad spending of a bleaker economic outlook and ever fiercer competition, with Netflix Inc. and Walt Disney Co. emerging as platforms with ad-supported subscription tiers for streaming video.

Against this backdrop, Snap forecast its first ever quarterly revenue decline earlier this year, in what represented its third straight disappointing update.

Analysts expect an 85% drop in adjusted earnings this year, compared with 40% growth at Meta, according to estimates compiled by Bloomberg.

Even in the event of a TikTok ban, Snap may not be best-placed to benefit, despite both catering more for younger users. Meta is increasingly focused on short-form video content, and according to Citigroup Inc. analysts is outpacing TikTok for user attention thanks to its Reels service.

Bloomberg Intelligence sees Google-owner Alphabet Inc. as the biggest winner, as its content-recommendation algorithm and revenue sharing model could shift TikTok content creators toward its YouTube platform.

“Removing a prime competitor would obviously give a significant boost to everyone in the sector, since you’re talking about eyeballs and time that would get redeployed,” said David Katz, chief investment officer at Matrix Asset Advisors.

He sees Meta as the biggest winner of a ban, given Reels is a similar service to TikTok. “But you can’t handicap this kind of outcome until it happens,” he said.

Tech Chart of the Day

Tesla Inc. shares rose 0.5% on Wednesday, extending a gain that came after the electric-car maker’s bonds were upgraded by Moody’s Investors Service. Moody’s became the second credit ratings firm to endow Tesla with investment-grade status, following a similar move by S&P Global Ratings in October. The stock’s rally extended its quarter-to-date gains to 61%, putting Tesla on course for its best quarter since a 64% gain in the last three months of 2020.