'Fast Money' traders talk about what the TikTok deal means for Big Tech

Summary of TikTok US Division Potential Sale

Key Concepts: TikTok US valuation, ByteDance, algorithm ownership, Oracle's role, Snap Inc. comparison, geopolitical influence, data security concerns, potential bidders, revenue generation, influencer economy.

1. Valuation and Deal Size

• The discussion revolves around a potential deal for the US division of TikTok, estimated at $14 billion.
• ByteDance, TikTok's parent company, has a valuation exceeding $300 billion.
• The $14 billion figure is considered surprisingly low, especially given that TikTok US likely generates 4-5 times the revenue of Snap Inc., which has a $15 billion enterprise value.
• The consensus is that multiple entities would likely outbid $14 billion; a bid around $40 billion is plausible.
• Ralph Lauren ($18 billion) and Williams-Sonoma ($24 billion) are used as valuation benchmarks, suggesting TikTok US should be worth significantly more than $14 billion given its influence and reach.

2. The Algorithm and its Ownership

• A central point is the ownership of the TikTok algorithm. The current proposal suggests ByteDance would lease the algorithm to the US entity, which would then "recreate" or "retrain" it.
• Concerns are raised about whether the recreated algorithm would be as effective as the original, potentially justifying a lower valuation.
• The algorithm is considered the core value driver of TikTok, making its ownership and control crucial.

3. Oracle's Position and Role

• Oracle is described as being "in the catbird seat" due to its existing relationship with TikTok.
• TikTok was Oracle's first major cloud services customer, a relationship described as lucrative.
• The deal is seen as "Oracle-friendly," possibly influenced by Larry Ellison's relationship with the White House.
• Oracle's involvement provides data security assurances through firewall management.

4. Geopolitical Factors and Regulatory Concerns

• The discussion mentions that five years prior, an executive order was signed to ban TikTok in the US.
• The potential deal raises questions about whether the Chinese government or ByteDance have approved it.
• The deal structure needs to satisfy US regulatory dynamics, especially regarding data security and national security concerns.

5. Snap Inc. and Market Dynamics

• Snap Inc. is compared to TikTok, highlighting different use cases: TikTok for scrolling and consuming content, Snap for direct messaging ("snapping").
• Snap's year-to-date performance (-23%) is noted, but it's suggested that Snap's stock could rally further, despite current market negativity.
• The possibility of acquiring Snap is raised, potentially driven by the TikTok deal's implications for the social media landscape.

6. Revenue, Influencer Economy and Growth

• TikTok has spawned many influencers, creating a robust influencer economy.
• TikTok's revenue base is considered lower than some other tech companies, but its growth potential is significant.

7. Potential Bidders and Deal Uncertainty

• Speculation exists regarding potential bidders beyond the discussed $14 billion valuation.
• The absence of sell-side analysis on TikTok's valuation is noted as surprising.
• The origin of the $14 billion figure is questioned, with JD Vance mentioned as a possible source.

8. Data and Statistics

• ByteDance's valuation exceeds $300 billion.
• TikTok US likely generates 4-5 times the revenue of Snap Inc.
• Snap Inc. has a $15 billion enterprise value.
• Snap is down 23% year-to-date.
• Ralph Lauren is valued at $18 billion.
• Williams-Sonoma is valued at $24 billion.

Conclusion

The potential sale of TikTok's US division is complex, involving algorithm ownership, geopolitical considerations, and significant valuation discrepancies. Oracle's role is pivotal, and the ultimate deal depends on satisfying both US regulatory requirements and the interests of ByteDance and the Chinese government. The $14 billion valuation seems undervalued, potentially opening the door for higher bids and further market consolidation involving companies like Snap Inc. The core value of TikTok lies in its algorithm and user engagement, making its future uncertain depending on the transfer of its core technology and how the retrained algorithm will work.