Microsoft's bid for TikTok is one of the more intriguing tech deals to come around of late -- but for investors, the unusual courtship could make for a tricky play.
Microsoft shares surged as news of the takeover talks emerged late last week, but pulled back Tuesday amid rising political tensions surrounding the deal. Late Monday, President Trump told reporters that the U.S. will ban TikTok on Sept. 15 if an American buyer doesn't snap it up by then, and Chinese officials condemned Trump's intervention. Microsoft (MSFT) - Get Report shares were roughly flat in Wednesday trading.
Despite the political drama, investors should stay focused on what TikTok brings to the table: a large, growing and highly-engaged user base.
"It begins and ends with 800 million users, and [TikTok's] database," said Raghee Horner, managing director of futures trading at Simpler Trading, a trading education firm.
In a blog post published Sunday night announcing its pursuit of TikTok's U.S. business, Microsoft didn't include any details about the potential size of the deal, but a CNBC report pegged it at between $10 billion and $30 billion. Microsoft is one of a few companies that can afford such a price tag, and has reportedly agreed to transfer TikTok’s database to the U.S. from China within one year if the deal goes through.
Investors appear to like the deal, although it likely wouldn't result in immediate benefits to the tech giant's top line. TikTok's revenue last year was estimated at $200 million to $300 million worldwide -- a drop in the bucket by Big Tech standards -- and its advertising business is still nascent.
Nonetheless, Microsoft analysts see longer-term advantages to owning a popular social network. Such assets are "rare" and very difficult to build from scratch, noted RBC Capital Markets analyst Alex Zukin in a note this week. Eventually, an asset like TikTok could offer a few benefits: For one, giving Microsoft access to a younger generation of users. Other potential moves could include blending TikTok's ad business with that of Bing, or infusing social video into its gaming business. Microsoft would also likely shift TikTok's cloud workloads onto Azure out of the gate.
Wedbush analyst Dan Ives estimated that a buyout of TikTok could shift investor focus to untapped potential in Microsoft's consumer businesses, and drive its valuation to the $2 trillion mark. Microsoft's market cap stands at about $1.6 trillion today.
Although the deal isn't guaranteed to happen, a purchase of TikTok would be a boon for Microsoft shares owing to the potential benefits to Microsoft's consumer efforts, Horner added. A deal that helped grow TikTok even faster could also benefit Fastly (FSLY) - Get Report, which runs TikTok's content delivery network. TikTok is already believed to be one of Fastly's largest customers, and Fastly's stock surged to a record high on Monday after Microsoft confirmed the TikTok buyout talks.
Likewise, there are risks -- and opportunities -- if the deal were to fall apart before the Sept. 15 deadline. Reacting to the possibility of a ban, some high-profile TikTokers have said that they'll take their followings to alternative platforms. Others circulated a petition pleading with Trump to keep the platform alive.
"There’s another side of this: If the deal falls apart, Facebook could benefit," Horner added. "We’re already seeing some of the folks on TikTok moving over to Instagram or Facebook."