I’ve spent the last two days on national television…
I’ve been explaining why Microsoft (MSFT) buying social media upstart TikTok is a terrible idea.
Based on the price action of MSFT since the news hit, I’m clearly in the minority:
After confirming it was in talks to buy TikTok, Microsoft’s market cap rose by $77 billion — which is more than the acquisition would cost.
But who cares! Investors’ gut reaction to news is often wrong.
What’s more, there’s something I didn’t share on air — and here it is:
There’s an unexpected way we can profit from this situation. And that’s why I’m writing today…
But before I get to it, first let me explain my rationale…
Microsoft is back in a big way.
Under the leadership of CEO Satya Nadella, the company’s focus and stock performance has dramatically improved.
In fact, since taking the helm in early 2014, shares are up a staggering 435%.
As a frame of reference, the Nasdaq was up about 165% over the same time period.
So the extra 270% of outperformance is all “alpha” attributed to Nadella, and his smart management and strategic vision.
More specifically, as Nadella laid out in a 2014 memo, “Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.”
By focusing on this new vision, Microsoft became a true competitor in mobile and cloud computing. And that’s where the TikTok stupidity comes in…
You see, TikTok’s short video platform and super young user base have NOTHING to do with Microsoft’s core competencies.
If anything, the 52 minutes the average user spends on TikTok per day detracts from productivity, which, again, is the key objective that Microsoft aims to increase.
Here’s some more data-based proof why the acquisition is a strategically bad idea:
- 41% of TikTok users are between the ages of 16 to 24. That’s not Microsoft’s key demo of corporate customers.
- 51% of TikTok users access the app on iPhones in the U.S. Again, not a key demo for Microsoft.
- 57% of TikTok users are based in China. That’s a huge regulatory concern, and frankly the only reason the company is considering a sale — to prevent it from being banned in the United States for national security concerns.
- Only about 10% to 15% of TikTok’s 800 million users are in the U.S.
The last data point is the most important.
Proponents of the acquisition insist it’s an unparalleled opportunity for Microsoft to expand its user base.
I completely disagree. The acquisition of LinkedIn and its 433 million users qualified as such, but not TikTok with its roughly 100 million users.
And certainly not at the prices being bandied around, which are nearly twice the cost per user as Microsoft paid for LinkedIn.
The List of Negatives is Longer
And let’s not forget that social media is fad driven.
The top performing platform of the day is quickly replaced. Not long ago, Twitter, Vine and Snap all held that distinction before growth topped out.
That means it’s perfectly conceivable that another upstart social media network will become more popular before Microsoft has any meaningful time to monetize a TikTok acquisition.
Let’s also not forget that Microsoft has a spotty history of social media acquisitions.
For example, remember Yammer? I didn’t think so!
Let me fill you in… Yammer was an enterprise social network that Microsoft bought for $1.2 billion back in 2012. The company (and its 5 million users) essentially disappeared. The acquisition was a total bust.
That means, even if user growth continues at TikTok, there’s no guarantee (only hope) that Microsoft can convert that into more sales and profits, based on its acquisition history.
I’m sorry, but in my 20 years in the markets, any investment decision based on hope alone doesn’t yield optimal results.
Last but not least, even if Microsoft were convinced it could somehow convert TikTok users into Office and cloud users, a huge regulatory risk exists.
Not only must a takeover pass the scrutiny of the U.S. government, but at any point in the future, the government could shut down the app based on national security concerns.
Again, this sounds like a recipe for disaster. So how do we play the situation for profit?
Snap to It!
In the wake of the Microsoft / TikTok tie-up news, shares of another video-centric social media company, Snap Inc. (SNAP), sold off hard.
Why? Because Snap’s daily active user growth came up short in the most recent quarter, and it’s viewed as the main competitor to TikTok.
Translation: What’s good for TikTok is bad for Snap, and vice versa.
Add it all up and I believe a ban of TikTok in the U.S. is a higher probability event than an acquisition by Microsoft.
The clock is ticking, too, as President Trump has threatened to shut down TikTok by September 15.
Even if Microsoft succeeds with a purchase, I’m convinced it’s only a matter of time before the company messes up the opportunity and ruins the growth.
In the former scenario, shares of Snap should rally fast and hard. In the latter scenario, it’ll just take more time for the rally to materialize, but it’ll be similarly strong.
Either way, I’m convinced we can position ourselves to profit from the doomed marriage of Microsoft and TikTok:
Buy cheap, long-dated call options on the ultimate victor, Snap.
Don’t miss out!
Ahead of the tape,