TikTok has more than 1bn users worldwide and is expanding far beyond just short-form videos. However, ByteDance, the Chinese firm behind the social media phenomenon is still a private company. But there’s one FTSE 100 share that offers us a way of investing in TikTok’s growth.
That stock is Scottish Mortgage Investment Trust (LSE: SMT), which aims to identify and invest in “the world’s most exceptional growth companies“.
Amazon, Tesla, Nvidia and Ferrari are among its standout holdings of the past decade.
However, the trust realised some time ago that many hyper-growth firms were staying private for longer and building more value while unlisted. So it secured permission from its shareholders to make investments in private companies.
Today, up to 30% of the value of its portfolio can be allocated to unlisted holdings. One of those is ByteDance, which owns both TikTok and Douyin (the Chinese equivalent of TikTok).
There are risks
According to TechCrunch, ByteDance is quickly approaching annual revenue of $100bn. In 2022, its EBITDA profit reportedly jumped 79% year on year to around $25bn. That EBITDA figure was higher than established Chinese heavyweights Alibaba and Tencent.
TikTok’s ad revenue rocketed 155% to nearly $10bn last year. But it also has big ambitions in e-commerce and recently launched streaming service TikTok Music.
Due to security fears, the app is now banned in India and Indonesia. It’s blocked on government-issued phones in the US, Canada, UK, parts of Europe and Australia too.
Some US politicians are even calling for an outright ban, citing fears that the Chinese government can access US consumer data, which ByteDance denies.
Needless to say, this is a risk for the trust as it currently accounts for around 2.9% of assets (about £350m).
In October, ByteDance itself was valued at $223bn, approximately 26% lower than a year earlier. But it could fall much further if there are more bans.
The market is worried
Ironically, the very thing that the managers hoped would build more value (private companies) has done the opposite lately. The market has become extremely sceptical of the valuations assigned to these unlisted assets.
As a result, Scottish Mortgage shares currently trade at a 14% discount to the net asset value of its portfolio.
Yet unlisted company valuations are adjusted regularly with help from an independent third party (S&P Global). The majority have been lowered since 2021 to reflect the fall in public markets.
Despite these markdowns, most of the firms continue to grow quickly. The average revenue growth rate of the top 10 private holdings was 38% in 2022.
In an uncertain global economy, that’s very encouraging.
ByteDance isn’t the only rapidly growing private firm held by Scottish Mortgage. Another is SpaceX, which dominates the commercial rocket launch market. Its Starlink satellite internet service has a massive market opportunity.
A further holding I’m bullish on is Northvolt, the Swedish battery developer that’s specialising in lithium-ion technology for electric vehicles. It reportedly has orders worth $55bn from Volkswagen, Volvo, and other Western carmakers. Reports suggest a Stockholm listing may happen at a $20bn valuation in 2024/25.
That’s why Scottish Mortgage remains one of my top holdings. It’s the only way for my portfolio to be invested in these world-class private companies.