A TikTok Ban Would Be Great News for Meta Platforms, But It Also Highlights a Huge Risk

In recent years, the biggest threat for Meta Platforms (NASDAQ: META) has been TikTok. Meta's response to that has been its Instagram Reels, which allows users to easily scroll through quick videos just as they would with TikTok. Now, if TikTok ends up getting banned in the U.S., Meta could stand to benefit on multiple fronts: More users moving onto Instagram, and more ad dollars coming its way.

It could set the business up for some great growth opportunities, but it also reminds investors of a big risk facing the company over the long haul: Rising competition.

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More revenue growth coming Meta's way?

A ban on TikTok could happen as early as next month. What it would mean is that the social media application won't be available for download from app stores. Users would still be able to technically use the application if they have it installed on their phones already, but without any updates, it could eventually stop working properly.

The U.S. government, citing fears of Chinese government involvement with the app, wants TikTok to be sold to a company outside of China. A deadline is in place for Jan. 19, 2025, and if TikTok isn't sold by then, the app could be swiftly removed from app stores.

For Meta, that would effectively almost eliminate a serious competitor in the U.S. market. Meta could be a big benefactor of the ban as advertisers, with fewer ways to reach U.S. audiences, may be inclined to spend more money advertising on Meta's social media applications.

Business is already going fairly well for Meta. Its Family of Apps segment (which includes Facebook, Instagram, Messenger, and WhatsApp) generated $115 billion in sales through the first nine months of 2024, which is a year-over-year increase of more than 22%. A faster growth rate could make the stock an even hotter buy next year.

The TikTok ban underscores a big concern for Meta investors

Getting rid of a big rival would undoubtedly be great news for Meta, but the stock surging in value due to this also highlights an underlying concern: Its applications may not be able to withstand serious competitors. According to a recent survey of U.S. teens, data from Pew Research shows that just 32% of teens use Facebook, while 23% use WhatsApp. The percentage rises to 61% for Instagram, which is still lower than TikTok at 63% -- and this is even as the threat of a ban is hovering over it.

Meta's strategy often relies heavily on copying other platforms. This reactive approach can help it play catch-up with new or better apps, but it means it may also be vulnerable should a new threat emerge. Even copying competitors hasn't necessarily led to surefire success. Meta created Threads in 2023, which is similar to X (formerly Twitter). But it doesn't appear to be resonating with younger audiences either, with just 6% of teens saying they use the platform, versus 17% who use X.

Outside of Instagram, the company struggled to win over young audiences. How it does with that demographic can be a good predictor of how it will do in the future, as many of these users may remain on their preferred social media platforms for years. As Reddit develops its advertising business and gaming platform Roblox works to offer unique advertising opportunities, advertisers will have many more options to choose from in the future when targeting young audiences, even if TikTok is banned. That could be a big problem for Meta.

Is Meta Platforms stock a good buy?

As of Monday's close, Meta Platforms stock has risen by more than 76% in 2024. It has been a red-hot stock, and a lot of that optimism is based on the assumption that a TikTok ban will soon go into effect. Even if that looks like a foregone conclusion at this point, that isn't enough to make it a slam-dunk buy.

Meta's stock is trading at more than 29 times its trailing earnings, but that multiple may climb higher if economic conditions slow down next year and companies scale back on advertising spending. The social media stock is at an all-time high, and with perhaps too much optimism priced into its valuation, I would hold off on investing in it today as a correction could be overdue.

Its lack of innovation and reliance on copying features and being a reactive company is why I wouldn't be optimistic that Meta will be able to perform well in the long run. I'm not convinced the company will be a top choice for advertisers in the future, as Meta's platforms could struggle amid greater competition. Its elevated valuation should provide investors with even more of a reason to be cautious with the stock right now.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Roblox. The Motley Fool has a disclosure policy.