TikTok Ban and its Potential Impact

Kori Hale: Hello, everyone and welcome to another great afternoon session on Public Live. We're going to be covering lots of things from The possible TikTok ban and its potential impact. With us today, once again is Mark Mahaney, senior managing director and head of the internet research team over at Evercore ISI. He is also the author of a new book titled Nothing But Net 10 timeless stop picking lessons from one of Wall Street's top tech analysts and we are doing a book giveaway. So if you want to get your hands on a copy, just send a DM to the public live handle. You see it right there on the top of your screen, folks. All right, it's time to get into it. Hi, Mark. Welcome back to public life.

Mark Mahaney: Hey, Kori. Good. Hey, good to hear you.

Kori Hale: Well, it's good to hear you too. A lot of change actually Mark since I last talked to you. I don't know if you're aware a lot in the financial industry has changed. But today we're gonna focus on the tech stuff and what's happening with TikTok, I mean, the company's CEO, he provided that testimony. He was on Capitol Hill this morning, where he really received some tough, tough criticism with one lawmaker even stating, and I quote, I expect today, you'll say anything to avoid this outcome, but we are not buying it. What were your takeaways from the TikTok CEOs testimony?

Mark Mahaney: I hope that none of my children ever have to go on the Capitol Hill and testify with the weekend that he had, I wouldn't wish that fate on my greatest enemy. So I'm sorry to carry on being kind of glib about it. But that was, you know, I respect him. And I respect him for going up there and taking that, it's kind of like Zuckerberg, you know, in the last year or two or two years ago, being brought up to Capitol Hill to testify. It's kind of like the leaders of tech being brought up there Bezos and, and Tim Cook, etc, are being brought up to testify that was just unfortunately for TikTok, they're going up against two major issues, social health concerns, related to social media usage. And then much more importantly, these days is national security issues. And so, you know, you knew that the question was just how much defense he could play in that time, and I didn't watchall of the testimony. But that's what I was just struck by and I think maybe more importantly, just today's testimony, the action question for all of us as public market investors because we can't invest in TikTok or, or at least not as a separate standalone asset. I don't think we'll ever see it that way, is what are the implications of this for other social media assets, specifically, Snap, Meta, and Google? And I think the probability of TikTok getting banned in the US is just increasing, you know, relatively materially over the last 12 months. I know there are a lot of constitutional issues around this. And I think they're very serious. But I just think that the odds of some sort of ban or major restriction have increased materially. And so that's kind of a pending catalyst. And anytime the news flow comes up, you'll see names like Snap and Meta outperform on that day, which is what you're seeing today.

Kori Hale: You know, I feel what I'm hacking a little bit more in terms of the broader social media context, because you did reference, you know, Zuckerberg having to go up there kind of, you know, defend all the stuff that Facebook, you know, had going on all the negative things specifically, right, that was happening. I mean, you even saw back in the day with Dorsey, he had to go there. Back when he was still leading his company. He co-founded Twitter. I mean, you see it across the board, it doesn't seem to be net like it doesn't seem to be ending anytime soon. And one of my takeaways from what happened today with TikTok, specifically, Mark is that I feel like they're also getting the brunt of all of the aforementioned right, big social media companies. It's like they've had enough time at the batting cage, right? With the Facebooks, with the Googles of the world, with the Snaps that now they're just ready to unleash completely on TikTok.

Mark Mahaney: Kori, I think that's right. But no, but don't forget this. I mean, we got a major political issue, growing political tensions between the US and China. And that's what made this tougher, I think, than anything that the tech companies had to face before because, you know, they,Those are US companies, you know, presenting in front of their elected representatives. That's not the case with TikTok and at the moment when relations between the US and China are at the lowest that they've been and, you know, I'm no expert on that. But um, in some time and maybe decades, so it's just, there's just a lot of different angles here that made it much tougher for TikTok to come through and again, it's kind of hard to see a political out here because it looks to look from where I stand it, it looks like the US military has banned Tiktok from personnel devices, personal and personnel devices. You've had more states do that. You've had a federal government do that you'd like that. That's from government-owned devices. So you've already gotten pretty far down the path here. You've never had that happen with any of the other apps. So and that's not because there's a greater social health issue related to TikTok than there was to Snap or to Facebook. It's because of the Chinese national security issue. So that this is just a bigger, this is just my this is more explosive of an issue.

Kori Hale: No, it definitely is something else that you brought up earlier is that you know, you don't think there will ever really see TikTok, as a standalone kind of investable company where people like you or myself, your company would be able to then you know, buy shares in TikTok, it is owned by ByteDance. However, are there some scenarios perhaps in your mind Mark that could play out if TikTok were forced to sell or spin on where it could become, you know, a company at some point that you are I could invest in?

Mark Mahaney: Well I don't think so. There was an article in the papers this morning in China that the Chinese government for the first time made an official statement that they would be strongly opposed to a forced sale of TikTok. So I mean, I'm no expert on China, I just assumed that there would be some statement that would come out along the way to this effect. Well, it's out. So I think that's why a ban is such a distinct probability, because I don't think ByteDance will be allowed, even if they wanted to, and I don't think they want to, they wouldn't be allowed to sell TikTok to a US company. So TikTok's in the middle of a geopolitical Firestorm that's, it's unfortunate for them. And you know, I give them all credit. This is a highly innovative company now, whether they actually create a national security risk, that's, you know, there are thorough, thoughtful arguments on that. But anyway, that probably matters. Neither here nor less, it doesn't matter now, Kori, we're not gonna be able to get the chance to invest. So let's focus on the companies that could be derivatives of there. That's Meta. Alphabet because of YouTube and Snap. And I really do think sometimes we spend a little too much time on Snap as a derivative. I think that the use case you know, for those who have used TikTok a lot, you think about what other assets like Snap is more of a communications tool than that kind of leaned forward entertainment tool. That TikTok is but the analogies are really, Instagram and YouTube and those would be the beneficiaries where they were TikTok to be banned.

Kori Hale: Okay, that was a foreign mission company is like Google because of YouTube likes Facebook, obviously, also owns Instagram. This is a perfect lead into my next question, because I know over at Evercore, you guys recently hosted a panel with three experts who collectively oversee $1 billion in ad budgets, these are companies that have really been struggling right in the ad space. But the panel revealed some signs that this ad a winter it could be starting to thaw, could you provide some insight into what you're seeing in the ad space, and how we could you know, positively impact some of those other companies that we could invest in?

Mark Mahaney: Well, I think we're still in an ad winter, I think that's what we've uncovered so far with, with the channel checks that we've done, maybe that's not terribly surprising. And, you know, there's a broadening consensus that, that we do have a recession coming. So you know, we could be staying in an ad winter for quite some time. I don't think we're going to see crocus's anytime soon. I think Kori, those are the first plants that show up in the snow out of the snow, but you're also into horticulture Mark, you're a man of many talents.

Mark Mahaney: And somebody can correct me on my pronunciation of crocus's. But, but, but I, I don't, I don't think we're gonna get a quick V shape recovery in marketing spend in advertising spend. And so that's going to be a bit of a drag on some of these names. The advantage and one of the reasons we like Meta frankly, one of the reasons it's our number one recommendation is you don't need to believe that to be long Meta, because they've taken so many of the costs out of their business. And then they've got this new reals, monetization, and they're doing much better targeting than they were years ago. And if you've got this new ad format called click to messaging, click the message which is used much less than the US but it's widely used outside of the US especially in areas of the world like Latin America and parts of Asia. And that's, that's a it's a brand new there's like a product cycle here. You need a product cycle because the overall market is getting soft, and it's not good. It's not firming up yet it's not getting better. And we're still in an ad winter and you know, we should probably assume we're gonna continue to be one for as it's gonna be a long winter it's gonna be several more months at least.

Kori Hale: Mark I don't know. I remember you being this type of pessimistic in terms of the ad winter continuing and then you brought up the dreaded R word recession, goodness, a lot of things in what you just said that are very important takeaways. I'm gonna keep it moving, though, because Amazon, this is a company that has been doing a complete like 180 in terms of its firing, it's not doing the speed hiring anymore. They just announced on Monday, they're gonna lay off another 9000 employees. Do you have any thoughts on this mark?

Mark Mahaney: Well, I think the big backdrop here is actually I thought Amazon was the first of the major tech companies to acknowledge that they had over hired overbuilt during the COVID crisis, they said this on their march 22 earnings call that was the that would have been last April, so about a year ago, but then they didn't really act on it. Whereas I think Facebook didn't acknowledge it early, but then they acted on it by laying off a good number of employees. Look, these layoffs are they're no fun for anybody there painful for all people involved. I've gone through it. And, so I wish it on nobody but you know, just as consumer households have to tighten their belts when times get tough. So do corporations, and especially those that over-hired and over-extrapolated from COVID demand trends. And Amazon was one of those, you could actually look they grew their expenses faster than they grew their revenue, and their revenue grew quickly, from 2019 to 2022. So they did overbuilt, they acknowledged it, and they needed to do one or two rounds of cuts, and they've done the two rounds of cuts. As long as we don't go into a steep recession, I don't think they need to do another round of cuts. But doing those cuts was necessary. You also had a bit of a change in but you've had a major change in management over the last two years. It's given a new CEO who's been with the company for 20 years. So he's not new to Amazon by any means. But it gets given them some time to maybe look through all the portfolio of bets, and assets that Amazon hasn't maybe pair some things back maybe not lose $10 billion a year on Alexa, which was a reported number, which was terrifically high. So anyway, I think I think that's kind of what you're getting out of Amazon, which is they're getting deep now into belt-tightening. And I do think that at the end of the day, when we come out of this, and when we get back to more normal economic times, companies are going to be doing this on the lower cost base. And that means you create what I call these EPS slingshot opportunities. So when the revenue recovers on a lower cost base, that means that earnings can grow much faster. And that can be a great long equity opportunity.

Kori Hale: Let's definitely hope that it will be really quick, Mark, before I get you out of here. I know that you are recently out in Las Vegas for the PROSPER show, which is a gathering of E-commerce sellers and solution providers just really quickly for all the rest of us who were not able to attend the show. What insights did you take away about the Amazon marketplace from that show?

Mark Mahaney: Well, it's still remarkably a positive experience for most sellers that are on there. And I think you're seeing a lot of them. I guess one of them the most part, the single most interesting takeaway for me was, I think it was 8 out of the 10. Amazon Marketplace, sellers that we spoke to are currently using advertising on Amazon. And Amazon don't tell anybody this but they're generating close to $40 billion a year in advertising revenue, they're going to be the next $100 billion a year ad revenue company. And that's not going to be next year or the year after. But sometime in the next three to five years. They'll be up there. I mean, they're gonna be in spitting distance of Facebook and Google. And because it's a high-intent platform and marketers and advertisers love to be in high-intent platforms. So that was probably the biggest takeaway. Merchants really like advertising on Amazon, watch this space.

Kori Hale: Wow. Well, the faculty said they're going to be in spitting distance of those big behemoths like Google and Facebook. That's definitely something to watch. As always, we love when you come on Public lot to share your insights. Once again, everyone this is Mark Mahaney, the senior managing director and head of internet research team over at Evercore ISI. Thanks so much for joining us, Mark.