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Stock Analyst Update

Microsoft Looking to Acquire U.S. Operations of TikTok

We are not immediately changing our fair value estimate for the wide-moat company.

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Reports surfaced July 31 that Microsoft (MSFT) was looking to acquire the U.S. operations of TikTok, which is wholly owned by Chinese software developer ByteDance. The deal would also reportedly include TikTok’s operations in Canada, Australia, and New Zealand. Talks fizzled after the Trump administration floated an outright ban on the app, then were back on again. The motivation for ByteDance to sell TikTok’s U.S. operations stems from national security issues raised by the White House as it relates to personal data collection by the Chinese government.

Other investors have also been linked to this potential deal. In a blog post over the weekend, Microsoft said it remains committed to the acquisition. Without more details, we expect the immediate impact of the acquisition would be additive to revenue and dilutive to margins, but given Microsoft’s size, we expect the overall financial impact to be minimal. We are therefore not immediately altering our $228 fair value estimate for wide-moat Microsoft.

Strategically, this would be an interesting acquisition for Microsoft. TikTok would dramatically improve Microsoft’s consumer exposure, especially on mobile, where it is lacking. Microsoft currently offers Bing for search, LinkedIn for professional networking, and Xbox Live for gaming. TikTok would immediately give Microsoft consumer content credibility while moving the company more squarely into Facebook’s territory and thus opening up a potentially substantial advertising revenue stream. We see TikTok sliding into the more personal computing segment and generally increasing consumer engagement, perhaps tied into Xbox Live. On the flip side, Microsoft announced in June that it is shutting down its Mixer business for video game livestreaming, and it is clearly seen as an enterprise-focused vendor, so we see some conflicting messaging for consumer-related content businesses. However, we see TikTok as providing the instant scale that Mixer was unable to generate.

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Dan Romanoff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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