Breakingviews - TikTok deal depends on how, not how much

A person holds a smartphone as Tik Tok logo is displayed behind in this picture illustration taken November 7, 2019.

DALLAS/MUMBAI (Reuters Breakingviews) - A potential takeover of TikTok hinges more on the “how” than “how much.” Some investors in the social media app’s parent company ByteDance, among them General Atlantic and Sequoia, want to buy the video-sharing phenomenon for $50 billion, Reuters reported on Wednesday citing people familiar with the situation. That valuation suggests it will expand much faster than rivals like Snap, but it also suggests – optimistically – that TikTok will make a clean break from its Chinese roots.

TikTok’s growth could, if the company is to be believed, be astronomical. Sales are projected at $1 billion this year, but management believes it could sextuple in 2021, according to Reuters. That steep assumption tweaks valuation dramatically. At this year’s figures, a deal would be done at roughly 50 times revenue, versus Snap which is valued at roughly 17 times revenue. Facebook and Twitter trade at roughly half Snap’s multiple, according to Refinitiv. Using next year’s figures, that valuation falls more in line with peers.

The trouble is that unless TikTok can pull off a government relations coup, a $50 billion valuation is extremely optimistic. The app was one of 59 mostly Chinese apps banned by India on national security concerns one month ago. For Beijing-based parent ByteDance, India has been the biggest driver of TikTok installs, accounting for 611 million downloads, or 30% of the total, according to SensorTower. Growth in the United States is a big determining factor, too. TikTok added 12 million American unique visitors in March, reaching 52.2 million, according to eMarketer.

Even a deal where ByteDance retains a minority stake may not satisfy regulators. The Committee on Foreign Investment in the United States has more power under new rules, including jurisdiction over deals in which overseas investors have a less than 50% stake. And in India – which was caught up in a deadly border skirmish with China earlier this year – a new owner might have to prove that the People’s Republic doesn’t retain any way to access user data. In short, there are a lot of boxes to tick – and until then, any mooted purchase price is more signal than substance.


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