Congress is getting closer to legislation against TikTok.
Shares of Snap (SNAP 6.70%) were gaining today as Congress appeared to move a step closer to banning TikTok in the U.S. or forcing its parent company, China-based ByteDance, to sell the rights to operate the popular social media app in the U.S.
While there was no company-specific news out on Snap, investors believe that a setback for TikTok would be beneficial to Snap, and the stock rose 7.1% on that logic as of 12:36 p.m. ET.
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A loss for TikTok is a win for Snap
Momentum has been building to a head in the Congressional fight against TikTok, which some legislators claim shares user data with the Chinese government. Now, House Speaker Mike Johnson plans to include a rider calling for the divestiture of TikTok in a bill focused on an aid package for Ukraine and Israel.
TikTok is protesting the move, calling the bill “unfortunate,” and saying it would “trample the free speech rights of 170 million Americans and devastate 7 million businesses.”
Why investors believe it could benefit Snap
The threat against TikTok has given a boost to social media stocks broadly, but especially to Snapchat parent Snap, which is seen as the closest analog to TikTok.
Like TikTok, Snapchat was created as a mobile app; it’s primarily focused on video, and it caters to a younger audience, so investors seem to think TikTok users will move to Snapchat if TikTok is blocked or limited in the U.S. Snap also makes the vast majority of its revenue in the U.S., meaning there would be a significant financial benefit to gaining a new U.S. audience.
However, that switch won’t be automatic. A divestment shouldn’t significantly alter the utility of TikTok and power-users like influencers and businesses would be reluctant to switch to Snap as they’d lose the valuable network they’ve created on TikTok.
Still, the issue is worth watching for Snap investors, especially as the company could use the help. Snap plunged in its most recent earnings report as revenue rose just 5% in the quarter, and it reported a generally accepted accounting principles (GAAP) loss of $1.3 billion.
