It seems like just yesterday that the tech world was buzzing about the prospect of Microsoft (NASDAQ:MSFT) acquiring the U.S. operations of popular app TikTok. In light of this, it’s likely that some folks added to their MSFT stock positions.
There’s an old saying in the financial markets. That saying is, “Buy the rumor; sell the news.” I’m usually cautious about buying a stock based on the possibility that a deal might happen. If the deal doesn’t go through as anticipated, the trading community is likely to be disappointed.
And when traders are disappointed, often they’ll punish a stock by selling it. I’m not suggesting that during a mid-September tech-sector drawdown, the TikTok debacle was the only contributing factor in the pullback of MSFT stock.
That being said, Microsoft’s losing bid to acquire TikTok’s U.S. business surely didn’t help anyone holding MSFT stock. However, this isn’t the end of the story. By all appearances, Microsoft is already moving on to bigger and better things.
A Closer Look at MSFT Stock
I’ve heard that September isn’t the best month for stocks in terms of seasonality. This might be based on facts or superstition, but so far in 2020, September hasn’t been particularly kind to tech stocks.
That’s not necessarily a bad thing for prospective investors in MSFT stock, though. If anything, the pullback provides traders with a chance to own the shares at a pretty good price.
At the moment, MSFT stock’s trailing 12-month price-earnings ratio is 34.3x. That’s fairly reasonable for MSFT and for tech stocks in general. It’s a sign that the stock probably isn’t in bubble territory.
On the morning of Sept. 21, MSFT stock briefly fell below the psychologically significant $200 level. Traders who focus exclusively on momentum might be concerned about that. On the other hand, value-oriented investors can take advantage of the lower price point in MSFT, which was trading for more than $230 earlier this month.
No Deal for Microsoft
Back in early August, sentiment ran high and financial message boards lit up as Microsoft CEO Satya Nadella reported on his discussion with President Donald Trump about Microsoft buying TikTok’s U.S. operations.
Actually, it wasn’t only in the U.S., as Microsoft planned to own TikTok’s business in Canada, Australia and New Zealand as well. Not only that, but this was all supposed to happen by Sept. 15.
This was a textbook example of the “buy the rumor” principle in action. If Nadella spoke with the U.S. president and so confidently set a target date for the acquisition, it must be a done deal. Right?
The next thing you know, a day before the Sept. 15 target date, the headlines are emblazoned with reports that Oracle (NYSE:ORCL) snagged the TikTok deal, not Microsoft. Thus, Microsoft’s plan to get access to TikTok’s user base, and thereby expand Microsoft’s presence with everyday consumers, fell through.
Don’t Worry, Be Happy
As an informed investor, you can either let the TikTok disappointment weigh on your mind, or you can just move on and focus on what’s ahead.
It appears that Microsoft isn’t getting bogged down in the past as the company is already eyeing another important deal. Granted, this one won’t likely generate the buzz and rumors that the proposed TikTok deal did.
Yet, this deal is significant in its own right. Reportedly, Microsoft is in the process of acquiring ZeniMax Media, which is the parent company of Bethesda Softworks. And Bethesda is a world-class video game developer that should be well known among serious gamers.
For $7.5 billion in cash, Microsoft will receive the rights to red-hot game titles like Doom, Quake, Fallout, Wolfenstein, Prey and The Elder Scrolls. This will easily be Microsoft’s biggest deal in the gaming sector.
The timing couldn’t be any better as Microsoft plans to release its Xbox Series S and Xbox Series X gaming consoles on Nov. 10. With a bevy of famous gaming titles in its possession, Microsoft won’t likely spend much time worrying about the loss of opportunities with TikTok.
The Bottom Line
Coming back from disappointment with aplomb is a sign of a strong, solid company. Investors in MSFT stock can relax and hold their positions knowing that Microsoft is looking towards a bright future, even without TikTok.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.