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Why Microsoft Shopping for TikTok is a Catastrophe within the Making
I’ve spent the final two days on nationwide tv…
Yesterday on Making Cash with Charles Payne… and at the moment on Mornings With Maria.
I’ve been explaining why Microsoft (MSFT) shopping for social media upstart TikTok is a horrible thought.
Based mostly on the value motion of MSFT for the reason that information hit, I’m clearly within the minority:
After confirming it was in talks to purchase TikTok, Microsoft’s market cap rose by $77 billion — which is greater than the acquisition would price.
However who cares! Buyers’ intestine response to information is usually unsuitable.
What’s extra, there’s one thing I didn’t share on air — and right here it’s:
There’s an sudden method we will revenue from this case. And that’s why I’m writing at the moment…
However earlier than I get to it, first let me clarify my rationale…
Strategic Stupidity
Microsoft is again in a giant method.
Underneath the management of CEO Satya Nadella, the corporate’s focus and inventory efficiency has dramatically improved.
Actually, since taking the helm in early 2014, shares are up a staggering 435%.
As a body of reference, the Nasdaq was up about 165% over the identical time interval.
So the additional 270% of outperformance is all “alpha” attributed to Nadella, and his sensible administration and strategic imaginative and prescient.
Extra particularly, as Nadella specified by a 2014 memo, “Microsoft is the productiveness and platform firm for the mobile-first and cloud-first world. We are going to reinvent productiveness to empower each individual and each group on the planet to do extra and obtain extra.”
By specializing in this new imaginative and prescient, Microsoft turned a real competitor in cell and cloud computing. And that’s the place the TikTok stupidity is available in…
You see, TikTok’s quick video platform and tremendous younger consumer base have NOTHING to do with Microsoft’s core competencies.
If something, the 52 minutes the typical consumer spends on TikTok per day detracts from productiveness, which, once more, is the important thing goal that Microsoft goals to extend.
Right here’s some extra data-based proof why the acquisition is a strategically unhealthy thought:
- 41% of TikTok customers are between the ages of 16 to 24. That’s not Microsoft’s key demo of company prospects.
- 51% of TikTok customers entry the app on iPhones within the U.S. Once more, not a key demo for Microsoft.
- 57% of TikTok customers are based mostly in China. That’s an enormous regulatory concern, and albeit the one purpose the corporate is contemplating a sale — to forestall it from being banned in the USA for nationwide safety considerations.
- Solely about 10% to 15% of TikTok’s 800 million customers are within the U.S.
The final knowledge level is a very powerful.
Proponents of the acquisition insist it’s an unparalleled alternative for Microsoft to broaden its consumer base.
I fully disagree. The acquisition of LinkedIn and its 433 million customers certified as such, however not TikTok with its roughly 100 million customers.
And definitely not on the costs being bandied round, that are practically twice the price per consumer as Microsoft paid for LinkedIn.
The Checklist of Negatives is Longer
And let’s not neglect that social media is fad pushed.
The highest performing platform of the day is shortly changed. Not way back, Twitter, Vine and Snap all held that distinction earlier than development topped out.
Meaning it’s completely conceivable that one other upstart social media community will turn out to be extra standard earlier than Microsoft has any significant time to monetize a TikTok acquisition.
Let’s additionally not neglect that Microsoft has a spotty historical past of social media acquisitions.
For instance, bear in mind Yammer? I didn’t suppose so!
Let me fill you in… Yammer was an enterprise social community that Microsoft purchased for $1.2 billion again in 2012. The corporate (and its 5 million customers) basically disappeared. The acquisition was a complete bust.
Meaning, even when consumer development continues at TikTok, there’s no assure (solely hope) that Microsoft can convert that into extra gross sales and income, based mostly on its acquisition historical past.
I’m sorry, however in my 20 years within the markets, any funding determination based mostly on hope alone doesn’t yield optimum outcomes.
Final however not least, even when Microsoft had been satisfied it might in some way convert TikTok customers into Workplace and cloud customers, an enormous regulatory danger exists.
Not solely should a takeover go the scrutiny of the U.S. authorities, however at any level sooner or later, the federal government might shut down the app based mostly on nationwide safety considerations.
Once more, this feels like a recipe for catastrophe. So how can we play the scenario for revenue?
Snap to It!
Within the wake of the Microsoft / TikTok tie-up information, shares of one other video-centric social media firm, Snap Inc. (SNAP), bought off exhausting.
Why? As a result of Snap’s day by day energetic consumer development got here up quick in the latest quarter, and it’s considered as the primary competitor to TikTok.
Translation: What’s good for TikTok is unhealthy for Snap, and vice versa.
Add all of it up and I consider a ban of TikTok within the U.S. is the next chance occasion than an acquisition by Microsoft.
The clock is ticking, too, as President Trump has threatened to close down TikTok by September 15.
Even when Microsoft succeeds with a purchase order, I’m satisfied it’s solely a matter of time earlier than the corporate messes up the chance and ruins the expansion.
Within the former state of affairs, shares of Snap ought to rally quick and exhausting. Within the latter state of affairs, it’ll simply take extra time for the rally to materialize, however it’ll be equally robust.
Both method, I’m satisfied we will place ourselves to revenue from the doomed marriage of Microsoft and TikTok:
Purchase low-cost, long-dated name choices on the final word victor, Snap.
Don’t miss out!
Forward of the tape,
Lou Basenese