The TikTok Effect: 4 Social Media Stocks to Watch Right Now

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2:19and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now.

2:35All right, folks. Welcome to Investing for Beginners podcast. Today, we're going to talk about some breaking news. Well, I don't know how breaking it is, but it's new news. we're going to talk about the TikTok effect. There was some news about TikTok recently, and we're going to discuss that and four social media stocks that we think you should watch right now and how this is all going to play out. So Andrew, why don't we tell everybody who haven't heard the news what's going on with TikTok and why is this a thing? Yeah, let's get breaking news coverage from two guys who don't use TikTok personally.

3:11And one guy who... I don't think I've ever actually been on it. Yeah. One guy who very publicly gives digs to the platform any chance I can get because I'm grumpy and a little bit behind.

3:29So I'll reference, there was a great podcast by Wall Street Journal. If you're really interested in the nitty gritty, go check that one out. CNBC also did an article about TikTok and what's been going on there. But from my understanding, just kind of following it. And if you're new to this, maybe this is helpful. But basically, TikTok has been a big bargaining chip between China and Trump. And what it's come down to is there was a deadline for TikTok to make a deal so that it was basically US owned rather than China owned. That deadline got pushed back, and then it was just last week, September 17th, where the next deadline was.

4:14Apparently, at the 11th hour, they made the framework of a deal, whatever that means. But the general idea that's being revealed, and these facts could all change. This is just a framework. Nothing's been set in stone yet. Under the framework deal, according to CNBC, they're going to split the app into a US version and a China version. 80 % of the US business for TikTok would have investors, which include Oracle, Silver Lake, and Andreessen Horowitz. The other interesting tidbit about that that I read about was that TikTok would still own the algorithm. Like the China TikTok, ByteDance is the parent company.

4:57They would still own the algorithm, but they would be essentially licensing it to the U.S. TikTok. From a user perspective, if you're a user on TikTok, you're going to get the option to transfer from the China TikTok to the U.S. TikTok, which I'm just going to make a wild speculation that if this deal goes through in the way that they are saying, everybody's going to eventually make that move because I'm imagining you won't be able to update the app. access new features, things like that until you go to the new US thing. So I don't know, a lot of information and interesting that it's a bargaining chip between Trump and China and with everything with tariffs and all the things that you see affecting the big macroeconomics, the big economic picture between the US and China and globally, that TikTok remains a big piece of it, which was once just this silly little app that a few kids used and now it's it's reached this big scale yeah it's it's really reached a big scale right it had a huge impact on meta and instagram and well and even you know the the old school facebook that you know the not a boomer yet but i'm i'm in the range of boomer uh that we all use and it's interesting how as you said this this little app china has become a big player in the social media sphere and has had a big impact on the negotiations between our country and China as far as trade relations go.

6:34And that Trump has been using this as a wedge or a lever to try to work out more favorable terms or conditions for the United States. And so it's interesting how that has all come to pass. My understanding, again, I've only seen this from like the 80 ,000 foot view, so even less than a 30 ,000 foot view, is that some of the concerns of why this became an issue was because there were concerns about data and how the Chinese company ByteDance was handling the data and whether that gave the Chinese government access to American information or data. And so that's why this became a thing. And it's going to be interesting to see how that part of it plays out.

7:21I truthfully don't know at this point where any of that concern is going to go if that is all negated because now the company is air quote owned by Oracle. What was the other one? Silver Lake something or other. And that one I've never heard of. And Andreessen Horowitz, which I'm familiar with. So I'm curious to see how that part of the concern with the company, if that will go away or if that will still be a concern but maybe less of a concern, that I'll be interested to see how that plays out. And how does it affect just Apple, Google in general with their app stores? If you look at the biggest companies in the S &P 500, we're in an interesting point in time in history where the S &P 500, if you're new to the stock market, 500 of some of the biggest businesses in the world in this index that when we call the market, that's what we're referring to.

8:22a huge percentage of that index today is the big tech companies, Apple, Microsoft, Amazon, Google, Facebook, and a couple others. NVIDIA obviously missing a big one. But if Apple has the App Store and we've seen how much they're drawing services being the huge revenue, we just talked about that about a week ago, services revenue really driving the business. And you got to think a lot of that comes from App Store. And then you have Google Alphabet also through their Android and Google Play getting that revenue. And then just Meta itself. Meta owns Facebook, Instagram. What's the chat they own? WhatsApp.

9:07WhatsApp, yeah. Yep. And how that affects them. This TikTok thing could swing the market in big ways. not only just how this event plays out, but also what kind of precedent it sets. Because you've got to think that's not going to be the last international app company that faces some sort of political pressure sometime in the future. And what does that mean for where lines are being drawn, where profits are being generated? And if TikTok grows to be something even bigger than what it is now, if TikTok or other apps ever turned into the super app kind of WeChat model that you see with Tencent and some other companies.

9:56How does that play into all of this? And does it become a bigger and bigger piece? So I don't know. Interesting. Yeah, it's very interesting. And it's already it's playing out in a different way in Europe, for example, with companies like Google, Apple and Meta, for example, and maybe even Microsoft to a certain extent. But those first three are certainly facing a lot of regulatory scrutiny in Europe. And I won't comment on the political part of that, but it certainly is impacting how those companies think about operating in those regions. And if there is any sort of blowback, so to speak, it could certainly impact the financial performance of a company like Google, for example, if they either have to put restraints on what they offer or how much they do offer in Europe.

10:47And that will have an impact unquestionably on the financials of a company like Google. They may see a 10 or 15 % impact on their revenues and their profitability down the line. And so I'm just speculating so that don't hold me to those numbers, but it certainly is going to have an impact if that kind of happens. And so this deal, like you said, with ByteDance and us in the United States and what's going on in Europe, it certainly is setting the forerunner for there being more concerns or more pushback from governments or from countries overall about how different things are used in their jurisdictions.

11:32And what may be appropriate or okay here in the United States may not be kosher in India, for example, and vice versa. And so I think this is probably setting most definitely setting a precedent for how those are going to play out in the future. And so it's certainly something to be aware of and keep an eye on because regulatory concerns when you're thinking about companies you want to invest in don't get talked about a lot until they happen. But it is certainly something to probably keep an eye on and keep in mind that, okay, when I invest in a company that operates mostly in, let's say South Africa, for example, there's different regulatory concerns you have to think about compared to maybe how they operate here in the US, for example.

12:14So it's certainly, it bears some keeping in mind and watching for sure. I mean, I, I a thousand percent agree with that. If that tells you how strongly I feel. pretty strong pretty strong um can we can bring it back to like a beginner something practical when you talk about regulatory risks or any risks a lot of times it can be on the sliding scale it could be on the spectrum give us we're not gonna hold your feet of the fire but just like some generalities of examples of countries and stocks where maybe it's more of a concern and maybe less concern i think south africa a great example of uh i would put that personally in my two hard pile i think the the regulatory environment there owning a stock in south africa is just way beyond my comfort zone but that's just me if you're a beginner looking to get into different international companies what would you say yeah i well the the first thing you have to think about is you have to realize that they are operating in it with a different system.

13:20They have different values and they have different things that are important to them or verboten or forbidden and other things that are totally kosher or okay compared to maybe what we think is okay here in the United States. For example, if you invest in a company like, I don't own it, I don't know much about it, but I'll just throw it out there as an example. If you invest in a company like Coupang, which is based out of South Korea. The business model may be very similar to Amazon, for example, which I think it probably falls in the same kind of style of business model. But the nature of the government in South Korea and the people that are using Coupang are going to have a different outlook and view of how they view different things that a company like Amazon may do.

14:07So for example, here in the United States, Amazon makes it very, very, very, very, very hard to cancel a Prime subscription. Incredibly difficult. And in South Korea, that may be against the law. And so they may have it right up front, broad-based, super easy to cancel. And I'm not saying they do or don't. I'm just using that as an example. And that could lead to maybe higher churn than what you're used to if you're looking at a company like Amazon, for example. Think about a company like Visa, a company that I own and Andrew and I both own. When that company operates in different jurisdictions, they're treated differently.

14:47And a good case in point is Australia. Australia has very strict rules on how they govern their debit card and their credit card transactions and the fees that companies using those platforms can charge. and there's nothing wrong with that, but you have to understand that so that if you're buying, let's say if you're buying another payments company that operates primarily in Australia and maybe tangentially in the United States, you have to understand that the regulatory rules are different and so the way that the company generates profits is going to be vastly different and it may be strikingly lower than what you're used to.

15:27You look at Visa and they have gross margins of 70, 80 % and you look at a company in Australia and maybe they only have 40. And it doesn't mean that Australia's payment company is a bad company. If you compare it to Visa, it may not look as good, but if you look at it in conjunction with other companies in Australia, it may be pretty good. So when you step into looking at investing in other companies that are outside of the US, you have to understand that they have different rules and different laws and things that they may find okay on a business level we may not hear and vice versa. And so you can't always just look blindly and say, oh, you know, hey, look at their margins are terrible compared to this.

16:15Well, that's because of the nature of where they're operating and how they're operating. And if they had the same rules here in the United States, maybe they kill it. So it's just something to keep in mind. And it's not sexy, for sure. And it doesn't get a lot of love out there. But it is something to be aware of when you're looking at investing abroad, is that there's different rules, different governments, different levels of what's acceptable in the society. And so you have to be cognizant of that. If you don't, then you could run into trouble. It's really speaking to that idea of know what you own and why you own it, know how the business makes money, all those sorts of things.

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19:18What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. So how do we think this? I guess maybe let's talk about how is ByteDance and TikTok, how have they impacted kind of the social media, the companies now? and then maybe we could explore what we think might happen with those companies going forward so if you look at meta uh pinterest snapchat and maybe instagram like how have the how have those companies been impacted by this yeah it's it's it's weird it's interesting it's weird um i got down a 10 cent rabbit hole so i'll try to pull myself out of that but we can get into that eventually.

20:05Another company I didn't realize until I was digging into the research is Reddit. It's kind of like another social media platform, depending on how you think about it. Maybe it could be like a blog with comments, but I saw at least one person was a little disappointed in where those numbers are trending. So the KPIs to really hone down on in this industry, DAU and MAU, daily active user and monthly active user. Basically, who are the people who are logging into these platforms and actually getting on there and generating advertising dollars for these platforms. According to the guy on Twitter, it was either DAU, DAO, or MAO was decreasing for Reddit.

20:48But when I looked in fiscal and the quarterly numbers, everything seemed great. They are growing user base a lot. So when you look at a company like Reddit, which just IPO'd a year or two ago. It was pretty recent. From a user growth perspective, I don't see much happening for Reddit. And maybe that makes sense because if you think about the context for TikTok, it's all video-based and then Reddit is text-based. So the investors like myself who want to always blindly apply numbers and metrics and financial data to these companies, missing the forest for the trees and understanding, okay, these are two separate kind of business models, essentially.

21:32You're targeting different use cases. For meta, I don't know what you found for meta, but I found that frustratingly, they've changed their KPIs recently. So we've gone to whatever the KPI was before to now it's a family number. And from what I could see for this company meta, there was no distinction between is this a Facebook user is it an Instagram user or is it I'm always blanking on this third one WhatsApp thank you user and I don't know how to figure that out so maybe it is affecting Instagram but they're able to cover it up by showing higher growth than Facebook users or WhatsApp users so I don't know did you find something about meta um no i mean i i think really the only thing that it is interesting that they changed their kpis and the conspiracy theorist in me thinks that they did that because they don't look as good and so now they're air quotes trying to cover it up uh but i have zero i have zero proof of that uh that is just you know 100 speculation on my part the companies will change kpis to always make their company look better in a longer view and so i think about for example netflix removing the the kpi of how many subscribers they have like that was a huge driver for the business and now they appear to be switching away from that.

23:15And so it's interesting that Meta is doing the same with their company, that they're switching away from the bedrock of what has driven their company all these years. So it makes you wonder why they're doing that. Now, the thing that I don't think anybody could argue is that Instagram with their reels and YouTube with their shorts have had, those are a direct reflection from the threat that TikTok presented to those companies. And they've had a huge impact on the social media impact and effect here in the United States, not only from those businesses, but also just from the social part of those apps in that there are now gazillions of Instagram influencers that are based solely on their videos.

24:09And there's lots of people doing that with TikTok Now there's lots of people doing that with YouTube. And I'm sure that if Elon had his way, Twitter would be the same or X would be the same. So I think there's no question you can say that TikTok has had a huge influence on those businesses. And for probably the better, has made them stronger and made them more profits and made them more popular than probably ever. Who here can't not doom scroll on Instagram for half an hour, right? That's, I think, a very normal part of a lot of people's days now. And that's a direct reflection on the pressure that TikTok put on a company like Meta.

24:57Yeah, one KPI I did find interesting. So before they had changed the KPIs, they had two KPIs that I kind of find important in understanding how Meta's business model is evolving. You have what they call the daily active people, and that was like family daily active people. And then they have average revenue per user. That's a common metric used in software businesses. It's ARPU, short for average revenue per user. Basically, how well are you monetizing the person who's on your app every single day? so in the time period between 2019 to 2023 so a four-year period the daily active number of people was up nine percent a year average revenue per user 11 percent however once you which is interesting that this coincides with when they changed the metrics uh when they changed the metrics the growth rate for the average daily people reduced so now it's more like in the range of six or seven percent instead of nine percent so you're seeing a slowdown of the number of not the number of people but the number the growth of the people joining meta's plat you know group of platforms.

26:25While average revenue per user continues to rise quite a bit. So it's almost gotten to a point where it's like doubling the growth rate of the user. Which by itself, in and of itself, is not a bad thing to be a business that's getting more profitable. but when you think about what Instagram and Facebook are essentially doing is to your point about the doom scrolling if you're getting higher average revenue per user you're getting them to stay on the platform longer you're getting them to watch more ads sure some of that is ads being more expensive as the economy grows but if it's growing much faster than GDP then that's just simply people engaging more on the platform.

27:11So is the TikTok effect, to your point, yes, people are getting more addicted to the platforms, but is TikTok also slowing the growth for the actual number of people joining Instagram or joining Facebook? And to me, I think at the great risk of just leaping to conclusions and thinking I found the answer because I saw some numbers. I think both things can be true. That TikTok is stealing some of that user growth, but also somehow contributing to this idea that we're just getting more and more addicted to social media. Yeah, for sure. I mean, those are really good insights. And I think the, I would, I would agree with your interpretation of the numbers.

27:55The question I would have about that is as the, you know, as the, I guess, ARPU continues to grow and the amount of people joining the platform flattens out, at some point you have to think that that reaches a critical mass number where they can only squeeze so much juice out of that. And, you know, what that number is, It could be 125 per person. Who knows? But it is definitely something to keep an eye on because if that starts to go the wrong way, then that is when you could start to see trouble. And not only for Meta, but for any company that's measuring on ARPU. And so that's definitely something to keep in mind.

28:47So even though they aren't giving us the same KPIs, I think you could still come to some interesting conclusions based on what is available. Yeah. Again, it was hard because you had to move between time periods. But 6.5 versus 11 is a big difference from a year to year to year, and then that compounds. So to your point, I do wonder what that critical mass is. if you're if you're a meta shareholder are you worried about this at this point in time it is certainly i would say for me it would probably be a yellowish flag where this is something that i would probably be looking at on a quarterly basis especially as he's trying to double down on the whole ai thing and i was just reading an article about the connected glasses that they were talking about.

29:43And so how that's going to play out and how AI is going to play out, I think Zuckerberg is smart enough. I know he's smart enough to see what we're talking about or the air quote writing on the wall kind of thing. And I think he's desperately trying to figure out a way that they can pivot, maybe not away from that, but to add another revenue stream to the business. And whether that's through AI or whether that's some sort of device like the glasses. I think that's why he's doubling down on that, particularly the AI, is he's looking for another avenue for revenue. Why do you think hardware?