Is TikTok's Valuation Overcooked? EU DSA Risks and the Case for Caution

The EU’s Digital Services Act (DSA) has emerged as a regulatory battleground for tech giants, but none faces steeper risks than TikTok. With investigations into algorithmic harms, election interference, and minors’ safety intensifying, the platform’s valuation—built on its 1.5 billion global users—now sits atop a minefield of compliance costs. For investors, the question is clear: Can TikTok’s growth withstand fines equivalent to 6% of its global turnover, or is its valuation overcooked?

The 6% Fine: A Sword of Damocles Over TikTok’s Financials

The DSA’s maximum penalty—6% of annual global turnover—could slash TikTok’s value overnight. In 2023, its parent company, ByteDance, reported $7 billion in revenue. A single fine at this threshold would cost $420 million, potentially wiping out a year’s profit. Worse, compounding liabilities loom:

• Algorithmic Risks: EU probes focus on TikTok’s “addictive” algorithm, which allegedly exploits minors’ attention spans. Critics argue its recommendations foster compulsive use, breaching DSA mandates to mitigate systemic risks.
• Election Integrity: During Romania’s botched 2024 election, TikTok’s platform amplified disinformation, prompting a formal DSA investigation.
• Minors’ Safety: TikTok’s reliance on self-reported age verification—instead of robust checks—has drawn scrutiny, with the EU demanding independent audits.

The stakes are existential. If TikTok is found non-compliant in multiple areas, fines could approach $1 billion annually, destabilizing its financial health and shareholder returns.

Competitive Disadvantage: Rivals Navigate Compliance, TikTok Struggles

While TikTok battles EU probes, rivals like Meta, X, and AliExpress have already begun navigating compliance—and even scored wins.

• Meta: Resolved its DSA investigation into “dark patterns” by agreeing to transparency reforms, avoiding a 6% fine. Its $797.7 million DMA fine (for antitrust issues) pales compared to potential DSA penalties.
• X: Faced a 2024 DSA probe over deceptive verified accounts but avoided fines by pivoting to transparency. Elon Musk’s public clashes with regulators may deter future penalties.
• AliExpress: Though under DSA scrutiny for counterfeit goods, it faces lower fines due to its smaller EU user base and lack of algorithmic “addiction” claims.

TikTok, by contrast, faces three ongoing DSA probes with no clear path to resolution. Compliance costs—like algorithmic redesigns or hiring independent auditors—could eat into margins, while rivals optimize for growth.

The Investment Thesis: Short-Term Risks Outweigh Long-Term Potential

Why Hold Off on TikTok Until 2026?

1. Valuation Overhang: TikTok’s $180 billion valuation assumes unchecked growth. Even a 3% fine would cost $210 million, reducing its equity value by 12%.
2. Operational Overhauls: Compliance could force TikTok to limit algorithmic recommendations, reduce engagement metrics, or restrict content—a death knell for its growth story.
3. Regulatory Uncertainty: The EU’s “effective, proportionate, and dissuasive” enforcement framework leaves room for escalating penalties.

Actionable Advice:
- Short-term: Avoid TikTok until Q4 2025, when EU probes may conclude.
- Long-term: Reassess only if TikTok secures DSA compliance and demonstrates sustainable user engagement post-algorithmic reforms.

Conclusion: Regulate First, Invest Later

TikTok’s valuation is a gamble on its ability to dodge existential fines and operational overhauls. With the EU’s DSA enforcement team targeting its core strengths—algorithmic virality and global scale—the risks far outweigh the rewards today. Investors should treat TikTok as a “sell” until the regulatory fog clears.

For now, the prudent move is to wait—and let the EU’s gavel decide TikTok’s fate.