Microsoft (NASDAQ:MSFT) stock leaped 5% Aug. 3 on news that the company might buy popular social media platform TikTok. Rumors of an accelerated deal came after U.S. President Donald Trump threatened to ban the TikTok app if parent company ByteDance did not sell it to a U.S. company.
And with Trump issuing an executive order banning TikTik and WeChat in 45 days if they’re not sold, the clock is ticking.
The scrutiny comes after ByteDance, a China-based company, was accused of using its app to collect data on Americans. It allegedly then provided that data to the Chinese government.
Regardless of the controversial associations, many investors assume that a buyout would add to the bullish case for MSFT stock. But a deeper look shows that it wouldn’t necessarily be an instant win for Microsoft.
Here are some of the pros and cons of a purchase.
TikTok Could Add Much-Needed ‘Cool Factor’ to Microsoft
A purchase of TikTok (currently valued between $10 billion and $30 billion) seems like a smart move for Microsoft. At least at first glance.
While it has notable strengths in cloud-based aspirations with Azure, Microsoft hasn’t always had the greatest success in other ventures. TikTok gives it easy access to a space it hasn’t yet been able to tap into: social media.
True, Microsoft has LinkedIn. But that’s designed solely for professionals, not the everyday person — not for casual use like Facebook’s (NASDAQ:FB) Instagram or Snap’s (NYSE:SNAP) Snapchat. It’s missing the widespread cultural impact TikTok achieved. That alone seems worth the price of admission.
A purchase of TikTok is an easy way for Microsoft to grab a platform with established “cool factor.” This is something the company has long struggled to obtain with many of its products. (The Xbox video game systems are a clear exception.) Shifting consumer mindshare with TikTok could add unexpected vigor to MSFT stock in the long run.
Research notes by analysts at Wedbush echo this sentiment. This is a unique opportunity for Microsoft to evolve its consumer strategy. With the old-time nickname “Mr. Softie” still ringing in the ears of many investors, Microsoft could use TikTok to take its brand into an entirely new direction. Wedbush analysts think it could expand its horizons beyond its cloud success and redefine its identity for a new generation over the next decade.
However, not all analysts are convinced this is a smart move.
Is TikTok Just a Distraction?
Many investors admire MSFT stock because of its breakout success with its cloud service Azure. However, some analysts worry that the TikTok purchase would require too much effort to make successful. They also worry that the required effort would distract from ensuring Azure’s growth.
Evercore analyst Kirk Materne explains: “TikTok could open up a much bigger [total addressable market] for Microsoft in the advertising market, but the consumer market is fickle … Microsoft needs to make sure that a potential acquisition of TikTok (<1% of revenue) does not overshadow the Commercial Cloud narrative that has powered Microsoft shares higher over the past five years.”
Similarly, Bernstien analyst Mark Moerdler asserts there are reasons for optimism but also concern. “[A] company cannot be successful at everything,” he said. “This is outside of Microsoft’s core in many ways.”
These critiques don’t even factor all the legal messes involved with running a social media platform. Microsoft’s absence here has enabled it to evade much of the scrutiny other tech giants currently face. But if TikTok is “worth $200 billion to Microsoft in just three years” as some project, the short-term pain could pay off.
The Bottom Line on MSFT Stock
Microsoft is one of those rare tech companies that has reinvigorated itself over the years. Today’s investors see MSFT stock as a viable cloud-based investment. It has a video game business that’s seen great success. Its office suite is increasingly essential too amid the novel coronavirus pandemic.
Under the guidance of CEO Satya Nadella, Microsoft has managed to stay relevant, all while reaching a trillion-dollar market cap. So does TikTok really add anything significant to the bullish case?
Yes and no.
MSFT stock is a clear winner without TikTok. It could be an even bigger winner with it added into the mix. But as with most investment scenarios, the greater the potential rewards, the greater the risk involved.
Ultimately, I can’t say TikTok would be good or bad for Microsoft at this point. All I can do is grab my popcorn and watch the madness unfold.
Robert Waldo has been a web editor for InvestorPlace.com since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.