It’s well-known that U.S. President Donald Trump isn’t a fan of Chinese social-media app TikTok. In order to have the app present less of a national-security threat, one solution would be for Microsoft (NASDAQ:MSFT) to buy TikTok, at least its U.S.-based operations. That would be a huge coup for the owners of MSFT stock as TikTok is quite popular among young Americans.
How popular is it? During the peak of the novel-coronavirus crisis, when young folks were bored at home and seeking diversions, TikTok crossed the threshold of 2 billion downloads. It was downloaded 315 million times just during the first quarter. Moreover, lifetime user spending for TikTok reached $456.7 million during that time.
So, those who own MSFT stock should be excited at the prospect of a TikTok acquisition. Yet there’s another competitor in the race to acquire TikTok’s U.S. operations. Should it be considered a serious threat to Microsoft? And could it have a negative impact on MSFT stock?
Twitter Enters the Fray
You might have heard commentators call TikTok the Chinese version of Twitter (NYSE:TWTR). I find that to be an odd and somewhat inaccurate description of TikTok. Sure, they’re both micro-blogging social-media platforms. However, there are vast differences between the two.
Twitter is used by many young people and older individuals. The most famous Twitter user is probably President Trump, who is in his 70s. Thus, Twitter doesn’t specifically target a young demographic segment.
TikTok, on the other hand, is almost entirely geared towards young users, particularly in the U.S. Even millennials might feel old as “zoomers” (Generation Z users) dominate TikTok with short skits, dances, and lip-synching.
Recently, reports have emerged that Twitter wants to buy TikTok’s U.S. operations. It’s tempting to think of Twitter as a natural buyer, since some people have called TikTok the “Chinese Twitter.” But that’s not even a particularly accurate description. Really, it’s more like Instagram or maybe even Snapchat.
Don’t Bet Against Microsoft
It would be great for Microsoft to introduce a new, younger generation of TikTok users to its umbrella of brands. That could help to combat any perception that Microsoft is a “boomer brand” geared towards Bill Gates’ generation.
Besides, Microsoft would undoubtedly benefit from the revenue that TikTok brings in. President Trump has effectively declared that a U.S. company needs to buy TikTok’s U.S. business by the middle of September. So far, it appears that the primary contenders are Microsoft and Twitter.
Twitter throwing its hat in the ring might be a juicy news item, but that doesn’t mean it’s a serious threat to Microsoft. Twitter simply doesn’t have the capital or the clout that Microsoft has.
Comparing the Numbers
Analysts at Wedbush believe there’s a 75% to 80% probability of Microsoft acquiring TikTok’s U.S. operations. I would tend to concur with this assessment. Just compare the relative sizes of the two competing companies, and I think you’ll agree as well.
Twitter’s market capitalization stands at roughly $30 billion. Meanwhile, TikTok’s domestic operations are, according to some analysts’ estimates, much higher than that, possibly even reaching $50 billion.
In contrast, Microsoft’s market cap is approximately $1.6 trillion. To put it simply, Microsoft can bring more capital resources to the negotiating table. It’s like a poker player with a mountain of chips competing against someone with a tiny stack of chips.
But don’t expect the media to depict the situation in this light. They need hot news stories, so they’ll make it sound like a really close, heated competition. But informed investors don’t have to buy into that narrative.
The Bottom Line on MSFT Stock
It’s easy to get caught up in the media’s hype machine. However, an objective observer can see that Microsoft will likely win the competition to acquire TikTok’s U.S. segment.
Thus, the owners of MSFT stock need not worry that the company will miss out on the opportunity to generate more revenues while connecting with a younger generation of users.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
