Recently, the U.S. House of Representatives passed a bill to ban TikTok. Should this ban be ratified by the U.S. Senate, several U.S. companies and the stock market could react negatively. With the measure passing in a 352 to 65 vote, it’s clear the US government sees a threat in TikTok. Though the bill needs to pass in the Senate, it could in theory result in ByteDance selling its TikTok division. Investors should watch out for stocks to exit ahead of Chinese app bans such as the proposed one.
Such a monumental shift in U.S. policy towards foreign companies could have widespread ramifications for future Chinese listings on U.S. exchanges. This ban could also directly impact the marketing campaigns of several companies that rely on TikTok for exposure. Thus, it is imperative to prepare for the possibility that Chinese companies could become pawns in a new economic Cold War.
PDD Holdings (PDD)
With the recent success of its subsidiary, Temu, PDD Holdings, (NASDAQ:PDD) might actually benefit in the short term from the TikTok ban. The company has positioned itself as a low-cost competitor to Amazon (NASDAQ:AMZN) in the e-commerce space. Yet it also competes with TikTok Shop in offering cheap Chinese goods directly from manufacturers. However, Temu relies on expensive social media advertising to reach consumers as it grows its current position.
Furthermore, general sentiment towards Chinese companies among U.S. retail investors may worsen. Should the U.S. government signal a willingness to ban companies based on national security, investors may choose to divest rapidly. Thus, PDD’s price stability could suffer in the wake of a TikTok ban.
Moreover, Temu is a relatively new venture in the U.S. and is still working on building its business reputation. This has proven difficult for PDD, as many American consumers are put off by the low-quality offerings on Temu.
Alibaba (BABA)
Essentially Amazon’s direct counterpart in China, Alibaba (NYSE:BABA) faces similar downsides should TikTok be banned in the U.S.. Much like the aforementioned Temu, Alibaba dominates the Chinese e-commerce market by offering inexpensive goods purchased directly from Chinese manufacturers. The company’s international reach is mostly limited to Aliexpress and its few cloud computing services. Thus, it could significantly be weakened by a shift in U.S. government policy.
That’s because AliExpress relies on capturing international markets, such as Europe and South America. Some countries in these regions are hardline opposers of the Chinese Communist Party and may follow suit by banning TikTok. Much like the challenges facing PDD Holdings, Alibaba could struggle to maintain its reputation in Western markets. This could ultimately result in retail investors deciding that Chinese stocks are no longer worth the risk.
Even more concerning is the fact that Alibaba’s CEO, Jack Ma, faced direct punishment from the Chinese government in 2020. Today, Alibaba’s new CEO has been strictly in line with the Communist Party, unlike his astute predecessor.
HelloFresh (HELFY)
As one of the companies with the highest spending on TikTok advertising, HelloFresh (OTCMKTS:HELFY) stands to lose exposure as a result of a TikTok ban. Known for its social media marketing, HelloFresh relies on short-form advertisements to spread awareness about its meal kit delivery services. Without TikTok, which reaches 170 million Americans a year, HelloFresh will have to advertise on more expensive apps.
This could significantly impact the company’s advertisement spending and overall revenues from newly acquired customers. Moreover, HelloFresh’s advertisements tend to perform well on TiTok due to the significant food culture present on the app. With so many viewers turning to TikTok for cooking and recipe videos, it is one of the most natural advertising outlets for HelloFresh.
This makes HelloFresh one of the stocks that will exit ahead of Chinese app bans, and it could see its stock price take a hit. However, should its share price drop, HelloFresh will recover because its business model does not need TikTok in the long run.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
