If Microsoft Pays $5B For TikTok America, Buy The Stock
President Donald Trump plans to ban TikTok from the U.S. At the same time, Microsoft is in talks to acquire TikTok’s U.S. operations, according to the Wall Street Journal.
That’s the same video app that contributed to empty seats at Trump’s June 20 rally in Tulsa, Okla., according to the New York Times. Forbes writes that this could be the real reason that Trump wants to ban TikTok.
If that deal goes through for the roughly $5 billion I estimate TikTok’s U.S. operations are worth, you should buy Microsoft shares.
Why? With LinkedIn slowing down — posting 10% growth in the June-ending quarter, the triple digit acceleration of TikTok’s user base could add oomph to Microsoft’s top line.
(I have no financial interest in the securities mentioned in this post).
Banning TikTok In The U.S.
TikTok, owned by China-based Bytedance Ltd., is a wildly popular video app — particularly among teenagers.
On July 31, Trump told reporters on Air Force One that he did not favor a deal to let a U.S. company buy TikTok’s American operations and that he had the authority to ban it, according to the Journal.
At 4:10 pm August 1, the Wall Street Journal, citing anonymous sources, reported that Microsoft had put the talks on hold — “after Trump said late Friday he opposes the deal.”
U.S. officials worry that TikTok could pass on the data it collects from American users to the Chinese government. This concern is abetted by a 2018 law that allows regulators to investigate deals that involve foreign investment in companies with over a million U.S. users that have access to their genetic, biometric, financial, health, or location data, noted the Journal.
In a July 29 statement, CEO Kevin Mayer said TikTok would never share such data and was committed to transparency. Nevertheless, the Journal cited anonymous TikTok executives who “feared that the U.S. government would force device makers to take TikTok out of their app stores.”
What Are TikTok’s U.S. Operations Worth?
As a privately held company, there is no definitive valuation for TikTok. What’s more, the uncertainty about the future of TikTok’s U.S. operations makes it hard to estimate its value.
Having said that, I think a good starting point for the value of TikTok’s U.S. operations is $5 billion.
How so? Bytedance was recently valued at $50 billion by investors seeking to take over the company, according to a July 28 report in Reuters. 10% of TikTok’s monthly active users — 80 million out of 800 million in July 2020, according to Wallaroomedia — were in the U.S.
Multiplying the two figures leads me to a $5 billion estimate for the value of TikTok’s U.S. operations.
Another way to look at this is to multiply TikTok’s $500 million U.S. revenue estimate for 2020, according to the Information, by rival Facebook’s price to sales ratio of 9.7. The result is about $4.9 billion.
There are many factors that could drop that valuation — including legal and political challenges. Yet the acceleration of TikTok’s growth and the possibility that ownership by Microsoft would limit the risk of U.S. user data getting to China could mean that Microsoft has to pay a control premium for the deal to go through.
To complicate matters, the Journal reported that Bytedance was recently valued three times higher — at $150 billion — in the secondary market. If a deal is struck, I hope to learn whether the right answer is closer to $5 billion or $15 billion (10% of that secondary market valuation).
Why Would a TikTok Acquisition Boost Microsoft Stock?
Microsoft’s biggest acquisition is not paying off as much as it used to.
Microsoft paid $26.2 billion to acquire LinkedIn in 2016. In February 2020 — before the pandemic hit the U.S. — LinkedIn represented almost 6% of Microsoft’s total revenue and was one of the fastest growing Microsoft businesses, according to CNBC.
Since then the pandemic has reduced hiring which has cut into LinkedIn’s revenue growth — resulting in layoffs. Indeed on July 21, LinkedIn announced the dismissal of 960 employees, or 6% of its workforce. LinkedIn CEO Ryan Roslansky said, “Our Talent Solutions business continues to be impacted as fewer companies, including ours, need to hire at the same volume they did previously,” noted CNBC.
TikTok’s U.S. operations could offset some of this revenue decline and give Microsoft a stronger position in the social media business dominated by Facebook and YouTube. Since the pandemic began, TikTok usage has increased — with the number of active users rising 15.1% between January 21 and March 24, according to the New York Times.
TikTok has benefited from the pandemic — resulting in more American monthly active users and a considerable amount of U.S. revenue. For example, according to Wallaroomedia, the number of Tik Tok monthly active users in the U.S. soared at a 122% annual rate from 20 million in November 2018 to 80 million in July 2020.
This June, TikTok’s U.S. revenue for 2020 was estimated at $500 million, according to the Information, around twice TikTok’s roughly $200 million to $300 million in worldwide 2019 revenue.
LinkedIn — which generated $6.9 billion in 2019 revenue, according to Statista — grew a mere 10% in Microsoft’s June 2020-ending quarter — the lowest rate of growth since Microsoft bought it, according to CNBC.
Even though TikTok’s U.S. revenues are small compared to Microsoft’s $139 billion total sales, its accelerating growth could pay off for Microsoft shareholders.