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There's a 'distinct possibility that TikTok actually gets banned,' expert says

Evercore ISI Senior Managing Director & Head of Internet Research Mark Mahaney joins Yahoo Finance Live to discuss what a potential TikTok ban means for social media stocks and other platforms, including Instagram, Facebook, Snapchat, and YouTube.

Video Transcript

- First, just your reaction to what we heard and what we saw play out on the Hill yesterday. A number of very fiery exchanges. And we didn't get a heck of a lot of information from Shou.

MARK MAHANEY: Well, I think the big takeaway is that there's deeply bipartisan opposition to TikTok. So that means that this is likely to be an overhang. There's not going to be any relief here for TikTok for at least the next two years. I don't know whether TikTok gets banned. But if we're honest about it, a year ago, we would have said the chance of a TikTok ban would have been low single digit. I'm not sure it's over 50%. But it's materially higher than it was a year ago.

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And this is very different than the hearings that we've watched in the past when the heads of a Meta or Facebook, Twitter or Google, Amazon, Apple were brought up. This was a national security hearing, at least that's the tone of most of the pushback on the company. And that's a very different dynamic. And given where US-Chinese relations are today, that's not going to get resolved any time soon.

So I think we should all assume that there's a distinct possibility, maybe not a probability, but a distinct possibility, 30%, 40% chance that TikTok actually gets banned. And that is going to create opportunities, no question about it, for names like Google, Meta, and Snap.

- Yeah. It's interesting. You say some of this was national security, Mark. But a lot of it could have been applied to Meta, to Google, to, frankly, Amazon. I mean, it was a strange hearing in that regard that, take out China, and many of these companies are similar. If you were to focus on a few of those companies, who do you think has the biggest upside if a ban goes in place? Is it Meta through Reels? Is it Alphabet through YouTube Shorts? Or maybe is it Snap, a bit of an outsider?

MARK MAHANEY: Look, I may be wrong when I say this. But I think it's very different than those other companies. The concern in the past was that maybe Facebook-- it's true-- was manipulated by a foreign government agency. That was Russia in the 2016 elections. Whether it was material or not, leave that aside. There was clearly an attempt by international actors to manipulate US audiences through social media.

The concern that came up right in yesterday's market was this would be an asset that could potentially be influenced by the Chinese Communist Party to influence the US and maybe to gather info, but really to influence the US because we've seen it before not by the Chinese, but probably by the Chinese government. So that is fundamentally different than what you had with other companies.

And I know there are other social health issues. My pitch has always been I thought those were way overstated and they could apply to a lot of media, not just digital media. But whatever. That's the past. What we do know is if you look-- and TikTok, as a technology analyst that focuses on innovation, I have a lot of respect for TikTok. They came out with something that was highly entertaining. You wouldn't have 150 million Americans using it if it wasn't.

And, well, what's going to happen is they've been taking traffic and time away, particularly from YouTube and particularly from Instagram. So the extent that TikTok gets its influence reduced, maybe gets its footprint in the US eliminated, that clearly benefits those companies. So Google benefits. And Meta does too. And in a small way I think Snap does too.

- Mark, what about your checks that you've been doing with ad spend and where advertisers are spending? Have we seen a shift at all away from TikTok given the uncertainty, given the fact that it could be banned, and towards some of the other players here in the US?

MARK MAHANEY: No, I don't think we have. I mean, I haven't picked it up in checks yet. It's a logical question. So that's what I've been asking marketers and agencies and advertisers over the last three to six months. I haven't seen signs of it. But it could happen. I mean, I think we all remember the pull-- we had a temporary pullback from Facebook advertising. There was a-- I forget what it was called. Quit Facebook on marketers' side too.

So I think you would have-- if it gets more controversial, you'll have CMOs having to respond to their CEOs and to the board saying, why are we advertising on TikTok? Not only for social health issues, but this has now become taboo in Washington, DC. So I could see how that would happen. But I've not yet seen that in the checks that we've done. I think it's a probability, though, that that happens. It's a greater probability that that happens, advertisers feel the need to pull back a little bit from TikTok, because of the political pressure that asset is likely to face. And it's not going to leave any time soon.

- One of the media stories we're certainly following this week is the rise of Netflix in the last couple of days. Not sure exactly what the catalyst was. But as you look now, up almost 10% this week perhaps on the new tier they've added. What do you make of this bump the last week? And what's your outlook for Netflix given the new tier?

MARK MAHANEY: Netflix is one of our top picks for the year. Our top picks are Meta, Uber, and Netflix. Netflix offers I think the biggest product catalyst out there across maybe all of media, but certainly across all of consumer media. They're introducing a brand new plan, basic with ads, or they started introducing it late last year. And this solves the problem that Netflix created for itself with all those price increases over the years. They painted themselves into a premium price corner.

So now they come out with a lower priced offering. They cut their price by 30%, roughly $9.99 to $6.99. But then on top of that, they can actually increase their RPU, their revenue per user, because they're layering in advertising revenue. I mean, you never see this in business history. Lowering prices by 30%, but raising RPU. Beautiful. So I think that's the real catalyst. All this volatility that we've had on Netflix, I don't think it's had to do with that. In the last month or so, we gave back all of the gains or most of the gains from the last earnings print.

I think what's happened is this debate about the password sharing crackdown and whether that's going to lead to a spike in churn. And I think the answer is it does lead to a spike in churn. But that's the first order impact. The second order impact and why I like buying it on this pullback, and I still like it right here, is that it's also going to lead to a bump up or an increase in the number of new subscribers and an increase in RPU overall because there are going to be people like me who are going to be willing to pay extra money for my two kids, two of my sons in college and another child over in boarding school.

I'm going to pay for them. So Netflix is going to get more money from me. I wish I could still freely share my password. But since they're no longer gonna allow it, I'm not going to cancel Netflix. I'm just going to pay a little bit more. And then I'm going to hope that my sons get some income and pay for themselves.

- Don't hold your breath, Mark.

- Might be a few years for that, Mark. I mean, certainly, we have seen some momentum here in Netflix. The stock up just over 11%. You also mentioned Uber as being one of your top plays. And, certainly, we have seen some momentum in shares since the start of the year. What's the catalyst there to keep that move to the upside?

MARK MAHANEY: I'm stumped. I'm not sure of the answer to that. I know you say the stock's up year to date. And it is, like 20%. But if you look at the chart, it just can't seem to break out of that mid-30s range, that $34, $35 range. And I sort of feel like, what the heck is going on here? I really like this stock. But when people investors and clients ask me, well what's the catalyst? I'm increasingly a little bit stumped.

They're generating consistent premium revenue growth. 20%. They finally started generating positive free cash flow. The amount is building each quarter. We just removed two of these regulatory overhangs. Prop 22 out here where I am in California. And then back in New York, the minimum wage issue with delivery workers. So if you had told me all of this at the beginning of the year, I wouldn't have said it's up 20. I would have said the stock's at 40 bucks. So whatever that would have been. It would've been up 70%, 80%, 90%. But it isn't.

So I'm a little stumped by it. I wish I had a better answer for why it isn't. I'm going to stick with the fundamentals. You're going to have a lot of free cash flow next year. I just don't think this thing is going to stay with the 6%, 7% free cash flow yield where it is now. I think the stock is going to materially outperform. I just thought it would do so earlier. So I'm a little bit stumped. But I'm sticking with it on fundamental and on valuation grounds.