Mark Mahaney, Evercore ISI Senior Managing Director and Head of Internet Research, joins Yahoo Finance Live to discuss a proposed ban of TikTok by U.S. senators.
Video Transcript
MARK WARNER: What we are trying to deal with here is the risks of insecure information and communication technologies, ICT, and whether that comes in the form of software, where, oftentimes, that software can provide backdoors into sensitive American intelligence and technology means, hardware, all of the Huawei equipment that, interestingly enough, was, oftentimes, sold into those rural markets where we had some of our national defense establishment, or social media platforms, where we’ve seen abilities to both collect data and present maligned influence operations.
DAVE BRIGGS: That was Senator Mark Warner, a Democrat from Virginia, unveiling a new bill titled The Restricting the Emergence of Security Threats that Risk Information Communications Technology Act. That’s a mouthful, but let’s be frank. This is essentially the TikTok bill, opening the door, potentially, for a ban of the Chinese-owned app. What’s been a bad sign for TikTok lovers, though, has been the opposite for social media investors. Snapchat and Meta both extending gains today. Here to break down what this could mean for social media stocks is Mark Mahaney, Evercore ISI senior managing director, head of internet research. Good to see you, sir. First, just what do you think the likelihood is that we actually get somewhere near a TikTok ban?
MARK MAHANEY: Well, I don’t know if I have a really well-informed political calculus on it. I assume it’s not a majority or I assume it’s not a probability, not greater than 50% chance. But clearly, it’s been rising over the last 18 months. The risk of some sort of TikTok ban has gone from low single digits to something in the double digits. So it’s really hard to handicap. But it is material, as you just pointed out, for what matters for stock pickers is, an issue like this is material for Snapchat, for Meta, and for Alphabet.
And by the way, even if the asset doesn’t get banned because what’s going to matter are there’s negative publicity around TikTok, and it’s going to be an issue for advertisers. So marketers at the margin are going to be somewhat hesitant about putting incremental ad dollars on a platform that could possibly be banned, and not only that, has sort of an increasingly negative stigma associated with it.
SEANA SMITH: That’s interesting, Mark. So you’re saying some of these other competitors out there, some of the US tech giants, could potentially benefit even without a full-out ban. When it comes to the government cracking down on tech, yes, this is foreign tech, but how are you looking at this from an analyst perspective and what that might mean here for the social media giants, which we know have also been under pressure from lawmakers over the next couple of months or potential couple of years?
MARK MAHANEY: Well, I’ll make a few observations. One is that those who thought that were arguing a case that Facebook needed to be greater, more aggressively regulated several years ago because it was a dominant social media asset, I think TikTok kind of undermined that thesis. You come up with a great social media platform– and TikTok has been hugely innovative. Anybody who has youngsters around the home, hopefully teens or higher, knows just how exciting, interesting, and entertaining TikTok is. And kudos to them. They created something, a really popular app. And they got billions of people to use it. My hat’s off to them as an innovation machine.
There are two issues that have been brought up here. There’s a national security issue which social media assets in the US don’t face in this sort of way. And then there’s also the social impact, which companies like Snap and Facebook have faced. So there’s a variety of cross-currents that are going on here. I just want to stick with the point that social media is a relatively competitive space by definition. We’ve had this monster asset called TikTok really come out of nowhere. And if you had an asset that was somehow limited in its appeal, that asset this popular, those people that are using it now are going to go somewhere. And our guess is that the biggest beneficiaries, it’s almost impossible not to say it’s Meta and it’s Snap.
DAVE BRIGGS: And that was– yeah, everyone’s been trying to emulate TikTok for the better part of two or three years. Who is the closest to doing it and therefore, monetizing it? And what about Google in terms of what they’ve done with YouTube Shorts?
MARK MAHANEY: Yeah, and I’m sorry. I should have mentioned Google’s obviously a positive derivative here, too. The two assets, I think, that we think based on survey work that are most similar to TikTok would be YouTube and Instagram in the form of like lean back or even interactive entertainment. Facebook is a little different. Facebook’s got a somewhat different demographic, and it’s a lot more about community and friends and family. And Instagram is much more kind of an open entertainment network. And so is YouTube, by the way. Twitter is not– Twitter is a vastly different asset than this. And in court, Google has almost nothing to do with TikTok.
But you actually make a really interesting insight. TikTok exploded the popularity of short form video. So? Everybody copied it. Facebook and Instagram have Reels. Snapchat has an asset whose name escapes me now, but it is there on the right side of the screen. And then YouTube has shorts. So, yeah, there’s a great– it turns out– and I’m not sure this is good or bad for society. I worry that it’s a little on the bad side– short attention– shorter and shorter attention spans.
But the market, consumers we love short form video. TikTok proved it to us. And so other companies have been very good about copying what was really great innovation. Credit to them. Ultimate credit to TikTok, but credit to these companies for coming up with things, these sort of spin-offs.
And by the way, it’s really helped them fundamentally. So even forget about what happens to TikTok. Facebook has seen an increase in its engagement, the amount of time that people spend on a site precisely because of Reels. It’s been very popular and very effective for Facebook. And my guess is that it’s going to be very popular for Snap. And my guess is that YouTube Shorts is building out greater interest in YouTube. So it’s kind of a win all across the ecosystem, even if TikTok isn’t banned.
SEANA SMITH: So, Mark, the threat from TikTok has certainly been a common theme amongst a lot of these social media players, as well as layoffs. And there was a report today from Bloomberg that Meta is planning to lay off thousands of more as soon as this week. Just, what your takeaway from the report and the layoffs that are still to come within the tech sector?
MARK MAHANEY: Well, we’ve had a lot of layoffs for a couple of different reasons. One is that I think large swaths of tech overemployed, overhired, overbuilt. And I think, in part, overextrapolated from the demand trends that came out of COVID, but I think there’s probably kind of creeping– I don’t know what the word is– creeping– it’s not imperialism. It’s creeping organizational. It’s the more– it’s almost like a vanity metric, the more people that you had working in your division, in your segment, in your group, in your company.
And so I think you’ve had some of these companies just way overhired. And what they’re finding is that they can maintain the same sort of growth if they cut out some of their employees. Look, I’m not– job layoffs are always challenging, and they’re not fun for anybody. I’ve gone through it. These are painful moments for companies and the people who get laid off. But there’s no doubt in my mind that there was some overhiring that occurred. And then you also had softening macro trends. So people overhired going right into a soft recession. At least, that’s a fair way to describe it, a soft recession where demand is kind of coming in. So, anyway, that’s what’s behind these layoffs.
My guess is that you’ll see more. One way to do it is look at who grew their revenue the most and who grew their operating expenses the most. And the companies that grew their operating expenses faster than their revenue, that was Facebook. That was Amazon. Those companies needed to take the steps that they’re taking now. And they’ll probably have to keep cutting a little bit more.
But I think all of this is a great setup for investors. I’m tactically constructive on the internet sector, consumer tech this year, precisely because I think estimates and multiples have been de-risked, but also because these companies have taken mature, belt tightening measures. We all tighten our belts when we go through a recession and incomes fall short. Companies need to do that, too. They’re doing that, and I think it’s creating more of an EPS growth– what I call an EPS slingshot opportunity on the other side of this.
DAVE BRIGGS: All right, Mark Mahaney, Evercore ISI, good to see you, sir. Thanks so much.
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