James Sullivan of JP Morgan discusses the US approval of the TikTok deal and its $14 billion valuation. He says the deal lacks clarity on who is in control of the algorithm, which leaves the national security concerns wide open.

New York

A recent discussion on CNBC highlights ongoing uncertainty regarding the valuation and national security implications of a proposed deal involving TikTok's US operations. Experts point out that without access to TikTok's core algorithm and clarity over user data rights, it is difficult to determine the true value of the platform or address the concerns raised by US lawmakers.

The central issue remains control over the algorithm that curates content for US users, which continues to be managed offshore. This unresolved aspect means that the deal does not fully address the national security concerns that prompted Congressional action, leaving the future of TikTok's US operations uncertain.

TikTok deal 'does not address' underlying national security concerns

How are you thinking about this valuation? You know, we've got Dan Ives over to Woodbush, whom we talk to pretty regularly, and who you probably know, saying, look, even without the algo, this thing should be worth close to $40 billion, and the vice president is saying, no, 14. So I would say it's hard to think about, purely from the perspective that we have absolutely no information. And so if I take a step back, if there's no algo associated with it, we have no idea what the physical infrastructure is, but data center space isn't particularly difficult to get given the level of capex that the majors are spending right now. Do I get access to the historical user information on 140 million people across the United States? We have no idea. So without the algo, without the ability to understand the impact of the algo on future users, the easiest way, and frankly, the only way we can look at this based on the information that we have, is subscriber acquisition costs across 140 million people, in which case we have no idea what number makes sense, or indeed what the number actually is when you look at it on a total basis. And so we need more detail to better understand. Okay, fair enough. But suffice to say that 140 million pairs of eyeballs, they are valuable, right? Especially to the president, but probably more important than that is the algo itself, right? Again, we don't know what access they have to the underlying algo. And so if you have a driver of user behavior that is sitting offshore, that is sitting within a black box, and you hope that it continues to work on a US-based population, ultimately, we still have to understand whether Congress is gonna take a view that you have an algo driving user behavior, influencing what US users are going to see and interact with on a daily basis that is still continuing to sit offshore. The entire rationale for Congress's activity in this earlier on was a view that whoever controls the algorithm controls what US users are seeing. And we have very clear experimentation from other social media companies that you can influence emotion, behavior, et cetera, off the back of what you curate to the audience. And so you have very, very clear, still open national security questions off the back of this, and we'll have to see what happens moving forward. I mean, suffice to say that it would be in the US interest, and they'd probably be pretty keen to actually buy that algo. The flip side is, I mean, very unlikely the Chinese would sell that algo to the US. A compromise could be licensing and paying to license use of that algo, but can you actually imagine the US paying to license use of a Chinese algo on US soil with 140 million mostly kids? I mean, that doesn't make sense either. With no influence over the construct and the future impact of that algorithm. And that's really the critical point here. And if you go back and look at first principles, what was Congress trying to address in the initial legislation? It was actually exactly that. And so again, it's very unclear how this solves the underlying issues that the US Congress was trying to address, and we'll have to see the response from Congress off the back of this. So, I mean, look, I don't wanna get into like conspiracy theories, but when you take a step back, my first thought was, okay, 14 million, everybody says it's way undervalued. It sounds to me like, okay, you get it, you buy low, sell high, right? When you mark the market, it's north of 40 billion probably. Again, without knowing what you're actually buying and what rights you have underneath the purchase agreement, this is an executive order that sits against a law that was duly passed by the United States Congress, and so we'll have to see how that works out.

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