Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Should Microsoft Buy TikTok?

Microsoft (NASDAQ: MSFT) could make money by buying TikTok from ByteDance. To explain, Microsoft is in negotiation to buy TikTok to stop the Trump administration from shutting down the App in the United States.

Unless you live under a rock, you know that President Donald J. Trump (R-Florida) threatened to ban TikTok on 31 July 2020. However, the Donald could welcome a sale of TikTok to Microsoft, Vox Recode speculates.

Microsoft is interested in TikTok because of the data the video-sharing app collects, The Verge speculates. Verge writer Tom Warren thinks Microsoft could use TikTok data to enhance Xbox Live and fuel Microsoft Research.

Could Microsoft turn TikTok into Xbox on your phone?

Another potential use for TikTok data is to build consumer friendly video creation apps for Windows, Warren speculates.

Finally, Warren thinks Microsoft could stream video from games such as Call of Duty  or Fortnite through TikTok. Microsoft could achieve game streaming by integrating TikTok with xCloud.

Thus, Microsoft could transform TikTok from social media into an extension of Xcloud and Xbox or a delivery system for augmented reality.

What Value doe TikTok have?

Theoretically, TikTok could generate enormous amounts of data because it has a huge user base.

For example, Oberlo estimates TikTok had 800 million users worldwide in July 2020. In addition, Oberlo estimates that users have downloaded TikTok from the App Store and Google Play two billion times.

Moreover, TikTok was the most downloaded app in the iOS App store in first quarter 2019. Plus, Oberlo estimates there were 165 million TikTok users in the United States in July 2020. Plus, TikTok is popular in China where there 196.6 million users in July 2020. However, TikTok’s largest market is India, where Indians have downloaded it 611 million times.

Finally, the average user spent 52 minutes a day on TikTok in 2019, Business of Apps claims. Plus, 90% of TikTok users use the app several times a day.

Does TikTok Make Money?

Hence, TikTok is addictive but its value is questionable because 41% of TikTokers are age to 16 to 24, Oberlo estimates. I think the age of TikTok users limits the app’s value because younger people have less money.

Yet, TikTok could become a major media platform because people watched one billion videos on TikTok each day in 2019, Influencer Market Hub claims. Impressively, Influencer Marketing Hub claims TikTok had a higher social media engagement rate per post than Twitter and Instagram in 2019.

Moreover, TikTok’s ability to make money could be small. For instance, users only spent $50 million on TikTok before October 2018. However, Business of Apps estimates TikTok’s 2019 revenue outside China at $176.9 million. Around 20% of that revenue or $35.38 million came from the United States, Oberlo claims.

Trump vs. TikTok is bad for Microsoft

Yet TikTok operates worldwide in 154 countries. Unfortunately, it is not clear if Microsoft is negotiating for all of TikTok or only the United States or North American operations.

One problem Microsoft faces here is being seen as a tool of Trump or a bully that uses the Trump administration to force other companies to sell out to it. In particular, Trump is threatening to shut TikTok down in 45 days if ByteDance does not sell it an American company. 

To explain, ByteDance is the Chinese company that owns TikTok. Other ByteDance products include the mobile video App Douyin, content discovery platform Toutiao, video app Xigua Video, social media platform Helo, the collaboration tool Lark, and the Indonesian news app Babe.

Moreover, the TikTok sale could look bad for Trump because it helps Big Tech get bigger. Big Tech is facing antitrust heat in America for recent acquisitions. To explain, Trump is trying to make Microsoft bigger and richer by giving it a new asset.

Microsoft is Making Enormous Amounts of Money

I predict Trump will face criticism for the TikTok affair because Microsoft (NASDAQ: MSFT) makes enormous amounts of money.

For example, Microsoft reported quarterly revenues of $38.033 billion that were growing at a rate of 12.8% on 30 June 2020. Moreover, Microsoft reported a quarterly gross profit of $25.694 billion on 30 June 2020. Microsoft’s gross profit grew from $24.046 on 31 March 2020.

Notably, Microsoft appointed a quarterly operating income of $13.407 billion on 30 June 2020. The quarterly operating income grew from $12.975 billion on 31 March 2020. Finally, Microsoft’s quarterly common net income grew from $10.752 billion on 31 March 2020 to $11.202 billion on 30 June 2020.

Microsoft Generates Enormous Amounts of Cash

For example, Microsoft reported a quarterly operating cash flow of $18.673 billion on 30 June 2020. That quarterly operating cash flow grew from $17.504 billion on 31 March 2020.

However, Microsoft’s ending cash flow fell from $2.846 billion on 31 March 2020 to $1.855 billion on 30 June 2020. Consequently, Microsoft’s cash and short-term investments fell from $137.636 billion on 31 March 2020 to $136.527 on 30 June 2020.

Interestingly, I think Microsoft is paying off enormous amounts of debt. To explain, Microsoft reported a negative financing cash flow of -$12.262 billion on 30 June 2020. That indicates Microsoft paid off $12.262 billion in debt.

Hence, Microsoft has less debt and an enormous pile of cash to play. Thus, Microsoft will have no problem buying TikTok or all of ByteDance, if CEO Satya Nadella wants.

Microsoft is an Acquisition Machine

I think Microsoft is a good stock because it has enormous amounts of cash, grows fast, and is an acquisition machine. Notable Microsoft acquisitions include GitHub, Orions Systems, CyberX, jClarity, LinkedIn, Citus Data, Spectrum, Blue Talon, Glint, Obsidian, Playground Games, Bonsai, Flipgrid, Ninja Theory, Semantic Machines, Skype, Cloudyn, and Deis.

I think Mr. Nadella’s acquisition spree is working because Microsoft’s revenues grew at a rate of 12.8% during a pandemic. The last revenue groth rate for Microsoft was 12.8% reported on 30 June 2020.

Consequently, Microsoft is worth the $212.65 Mr. Market was paying for it on 6 August 2020. In addition, I consider Microsoft’s 51₵ quarterly dividend last paid on 17 June 2020, safe.

Microsoft offered investors a 0.96% dividend yield and a $2.04 annual dividend on 6 August 2020. credits Microsoft with 10 years of dividend growth.

In the final analysis, I consider Microsoft (NASDAQ: MSFT) is that rare creature, a strong growth stock with a great dividend and a high margin of safety. Investors who want the total package of income, growth, and safety need to examine Microsoft. With or without TikTok, Microsoft is a great stock.