Oracle Isn’t a Good Fit for TikTok, so Buy Facebook Stock

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Over the weekend, the TikTok roller-coaster took a few turns, all of which can be succinctly recapped as follows: Oracle (NASDAQ:ORCL) — not Microsoft (NASDAQ:MSFT) — will most likely be buying TikTok, and the acquisition also likely won’t include the app’s source code or the platform’s underlying algorithm. The investment implications of this news are obvious. Buy Facebook (NASDAQ:FB) stock.

Source: Chinnapong / Shutterstock.com

Why?

Because Oracle doesn’t know a thing about running a social media platform, let alone a super-trendy social media platform built for high school kids. And, without the source code or the algorithm, the TikTok app post-Oracle acquisition will be a shell of its former self.

Over time, consumers will leave TikTok and rush to the next best short-form video product on the market — Instagram Reels. Facebook’s user and revenue growth numbers will accelerate over the next few quarters. As they do, FB stock will charge higher.

So buy FB stock today.

Here’s a deeper look.

Oracle Doesn’t Know a Thing About Social Media

Oracle is a business software company, which provides cloud infrastructure and cloud applications to businesses.

TikTok is a social media platform, which provides entertaining videos to high school kids and 20-something-year-old consumers.

The two could not be more different. It’s the mismatch of the century.

Oracle may be really good at understanding and catering to enterprise behavior. But consumer behavior is an entirely different animal which the company knows nothing about. And it’s not like Oracle can just turn into consumer behavior experts over night. This is a complex space, with a lot of moving parts, and tons of competitors like Facebook, Snap (NYSE:SNAP), Twitter (NYSE:TWTR), Alphabet (NASDAQ:GOOG) and Pinterest (NYSE:PINS) who have been at it for decades and most of whom have more resources than Oracle.

So what happens if Oracle — a company that knows nothing about social media — buys TikTok?

Well, we’ve seen this rodeo before.

Back in 2005, when News Corp bought MySpace. News Corp had no idea how to run a social media platform. The company applied antiquated, out-of-sync business practices and ideas to an up-and-coming social media platform. MySpace quickly lost relevance in a hyper-competitive space. Users fled. Revenues dropped. And today… well, does anyone have a MySpace anymore?

It’s very easy to see TikTok going down the same road if Oracle acquires it, because the reality is that Oracle doesn’t know the first thing about running a social media platform built on the back of high school kids making short videos.

TikTok isn’t Much Without It’s Algorithm

It doesn’t help that Oracle likely won’t acquire TikTok’s source code or the algorithm.

It remains unclear exactly how this acquisition will work. But, in the event that the algorithm which powers users’ feeds altogether disappears from TikTok’s U.S. app, then that will be a huge hit to engagement.

That’s because TikTok isn’t much without it’s algorithm.

Anyone can make a short-form video app. Indeed, a lot of others have. But the secret sauce at TikTok is its algorithm, with essentially eliminates social preferences and instead populates your feed quickly with things based on your interests (as deduced from what videos you watch and for how long you watch them).

Anyone who has used the app knows that this algorithm is genius, and gets to know you very well, very quickly, and is thereby nearly perfect at populating your feed with videos you’ll love.

It also provides an engaging, low-friction way to hook new consumers. Whereas on Instagram and other social platforms you often need to follow people and connect with friends to fully enjoy the content on the platform, TikTok’s algorithm allows new users to fully enjoy the content on the platform right away.

Needless to say, without this algorithm, TikTok just isn’t TikTok.

The Exodus to Instagram Reels

As of today, the most likely path forward here is as follows.

Oracle acquires parts of TikTok’s U.S. app, but not the algorithm. The TikTok user experience deteriorates meaningfully over the next several quarters. As it does, video-addicted users flee the app. They flock to the next-best short-form video product on the market, Instagram Reels. And, in 2021, Instagram Reels does to TikTok what Instagram Stories did to Snapchat in 2017: Steal its thunder, users and advertisers.

Of course, all of this is great news for FB stock.

Just look at what FB stock did back in 2017.

On the back of Instagram Stories accelerating Facebook’s user and revenue growth trajectories, FB stock rose more than 50% in 2017, marking its best year since its first year as a public company.

Given the current environment of rebounding ad spending, bullish tech sector sentiment and consumers becoming more addicted than ever to social media, it’s easy to see robust uptake of Instagram Reels in 2021 sparking equally huge growth for FB stock in 2021.

Bottom Line on FB Stock

FB stock one of the market’s best long-term investments. It just so happens that this long-term winner also has a huge near-term catalyst in the form of Instagram Reels.

The investment implication is obvious.

Buy FB stock.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. 

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