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TikTok Fuels Microsoft Rally, But Investors Shouldn’t Get Excited

Last Updated September 23, 2020 2:10 PM
Simon Chandler
Last Updated September 23, 2020 2:10 PM
  • Microsoft shares rallied over 4% Monday after the company confirmed talks with Donald Trump regarding its takeover of TikTok’s U.S. operations.
  • The market is getting excited, but TikTok won’t earn Microsoft huge revenues.
  • TikTok brings a fraction of the earnings of Facebook and Twitter, while Microsoft doesn’t have a great track record outside of enterprise tech.

Microsoft (NYSE:MSFT) rallied over 4% Monday after the company revealed plans to buy TikTok’s U.S. operations. The popular social media app is at risk of being banned in the U.S., but Microsoft believes its acquisition will resolve security concerns raised by the Trump administration.

With expected 2020 revenues of $500 million in the U.S. , TikTok could be a significant acquisition for Microsoft. So far, the tech giant has failed to crack the social media sector, but TikTok could change its fortunes.

While investors seem to think so, their optimism is misplaced. TikTok may have experienced dizzying growth in recent months, but it’s likely to remain relatively small compared to established social networks. Microsoft also has a poor track record with consumer tech, not to mention the acquisition still isn’t a done deal.

Microsoft Stock Rises After Revealing TikTok Plans

Microsoft’s share had already been performing well, being up 35% year-to-date. It rose more than 4% Monday morning en route to a high of $215.

Microsoft stock price comparison chart
Microsoft (blue) has outperformed Google (purple) and the S&P 500 (red) this year, although it hasn’t outperformed Apple (green). | Source: Yahoo! 

Microsoft shareholders have a blog post  to thank for today’s rally. The post revealed that CEO Satya Nadella spoke with President Trump regarding the possible acquisition of TikTok in the United States, Canada, Australia, and New Zealand.

The post gave the impression that Microsoft is answering the security concerns the Trump administration has raised regarding TikTok .

Soon after the blog was published, reports emerged that Trump has given ByteDance 45 days to negotiate the sale of TikTok.

Reuters Microsoft TikTok Trump report
Reuters spoke to “three people familiar with the matter” for its report. | Source: Twitter 

The Market Gets Excited Prematurely

Microsoft’s price shows that the market is already getting excited about the still-hypothetical deal. Tech entrepreneur (and former presidential candidate) Andrew Yang tweeted that it’s in everyone’s interests.

Andrew Yang tweet
Andrew Yang tweets that everyone involved will benefit from a Microsoft takeover of TikTok’s U.S. operations. | Source: Twitter 

Former Microsoft CEO Steve Ballmer told CNBC that he thinks the potential deal is “exciting.”  He says Microsoft has a “track record of having to work with government” on regulatory issues.

Yet commentators and the market are getting ahead of themselves. Microsoft may have just increased its market cap by over $70 billion , but TikTok won’t add anything of that magnitude to the company’s balance sheet.

TikTok has multiplied in recent months. Its worldwide revenue rose by a reported 300% in Q4 2019 . Its absolute size is still relatively small, and will likely to stay that way.

It grossed $177 million in worldwide revenue in 2019 . This might seem impressive, but Facebook generated $18.69 billion in the second quarter of 2020 alone . Even Twitter’s Q2 2020 revenue was $683 million .

TikTok is not likely to be a massive money-spinner for Microsoft. It may be fashionable right now, but its narrow functionality–making short videos–means it will remain marginal compared to the big players, at least in terms of revenue.

Then there’s Microsoft’s poor record in social media and other non-enterprise technology. Bing has barely made a dent in Google’s monopoly, for example, while the firm gave up trying to sell smartphones years ago.

It’s also not guaranteed that ByteDance will agree to sell Microsoft. The two may disagree on price, or Trump may change his mind again , leaving today’s market euphoria with nowhere to go.

That’s why buying Microsoft’s price rally is more of a speculative bet than a cast-iron guarantee of riches. Even if the deal does go through, it won’t provide a massive boost to Microsoft’s bottom line.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.