Earlier this week, shares of social media companies such as Snap (NYSE: SNAP) and Meta (NASDAQ: META) gained pace after the Federal Communications Commission (FCC) said the U.S. government should ban TikTok, a China-based short-video platform.
In an interview with Axios, Republican Commissioner Brendan Carr claimed, “I don’t believe there is a path forward for anything other than a ban."
According to a CNBC report, “The Committee on Foreign Investment in the U.S. (CFIUS) in the Treasury Department is reviewing the company’s (TikTok’s) potential national security implications, given its ownership by a Chinese company, ByteDance.”
There have been concerns over data security risks associated with TikTok, and the government administration in the U.S. has again raised this issue. However, TikTok has confirmed it does not store the user data of its U.S. customers in China.
TikTok has gained significant traction
TikTok initially revealed its user details back in 2020 when the company challenged another ban from the U.S. two years back. The TikTok platform was launched in 2017, and it managed to acquire 11 million users in the United States by January 2018. This number rose to 27 million in the next 12 months and soared to 91 million by June 2020.
Comparatively, its monthly active users globally rose from 85 million in Q1 of 2018 to a staggering 1.46 billion by Q2 of 2022. The company attracted 138 million users from North America by the end of 2021.
TikTok was banned by India in 2020, which was one of its largest markets, as tensions between China and India rose at the onset of COVID-19.
TikTok’s rising popularity has shifted digital ad spending towards the platform and away from Snapchat and Instagram. Due to TikTok’s rising competition, a challenging macro-environment, and privacy changes from Apple, revenue for Meta and Snap have decelerated at a rapid pace this year.
In fact, Meta reported two consecutive quarters of revenue decline in Q3 as its sales fell to $27.71 billion in the September quarter from $33.6 billion in Q4 of 2021. Analysts now expect
Meta’s sales to fall by 1.1% to $116.6 billion in 2022, which will be the first year-over-year decline for the social media giant.
Similarly, after sales soared by more than 50% to $4.11 billion in 2021 for Snap, analysts expect top-line growth to decelerate to just 12% in 2022 and to 9.2% in 2023.
Due to these reasons, Meta stock and Snap stock are down 76% and 88%, respectively, below all-time highs.
Can Snap and Meta stock make a comeback in the near term?
Both Meta and Snap will need to improve engagement rates on their platforms as they face growing competition from the latest entrant on the block. Further, an uncertain ad market and an inflationary environment, including rising interest rates, will remain near-term challenges as enterprises are likely to face a global recession in 2023.
The cracks on the Facebook wall first appeared in late 2021 when the platform lost a million daily active users in Q4 of last year. Loup Ventures managing partner Gene Munster had then warned a drop in user growth would send a shockwave to investors, and Meta stock has consistently declined in the first ten months of 2022.
Brands are not motivated to invest in ad placements in recent months as lagging supply chain lead times have lowered ad budgets. Companies are not willing to market products if these items are not going to hit retail shelves.
It is going to be a rocky ride for investors of Snap and Meta as these headwinds are unlikely to abate in 2023.