Can a deal to buy TikTok breathe some life into Microsoft, or will it even go through?
This article was originally published on Opto – Understand What Really Moves Markets.
Year-to-date, Microsoft’s [MSFT] share price is up 31.5%, having leapt 59.4% from its 52-week low of $132.52, to which it fell to during March (through 9 September’s close).
That said, a pullback in tech stocks in recent days has hit the software giant hard. Microsoft’s share price fell 12.5% between 2 and 8 September.
Walmart’s [WMT] share price, meanwhile, is up 18% for the year to date and 31.4% since its 52-week low, to which it dropped during the market sell-off.
At the start of August, Microsoft’s share price jumped a couple of percentage points in intra-day trading when news of a potential bid to acquire TikTok (whose US operations have been valued at more than $20bn) from Chinese firm, ByteDance, first broke.
Following the announcement at the end of the month of a potential partnership between Microsoft and Walmart, Walmart’s share price reached an all-time high on 28 August, which it went on to supersede on 2 September. Microsoft’s share price also crept up by 1% on 28 August.
Microsoft is the frontrunner to buy the hit video-sharing app TikTok and is set to join forces with Walmart to complete a deal.
Will this deal go through? What would the outcome mean for Microsoft and Walmart’s share prices?
The social media space
A move into social media may seem like a sideways step for a retailer like Walmart, but analysts believe it’s a play to attract younger shoppers.
In the second quarter of its current fiscal year, Walmart saw ecommerce sales climb 97% year-over-year. In Q1 2021, ecommerce sales were up 74% compared to a 35% growth rate in Q4 2020. While the surge in the first half of the fiscal year can be attributed to people having to stay at home and have groceries delivered, the coronavirus pandemic has created a significant tailwind that Walmart hopes to take advantage of by targeting younger shoppers who prefer to purchase online.
Michael Lasser, equity analyst at UBS, wrote in a note to clients: “Connecting with a younger audience is vital to Walmart’s long-term outlook, especially as more digitally native generations move into their prime consumption years… Having a better understanding of the younger consumers through their social media habits would be valuable to Walmart.”
It helps that the retail giant already has a presence on TikTok. Its channel, which is used to showcase make-up, clothes and gadgets, has amassed a following of 312,700, as of 10 September, with its videos receiving a combined 1.9 million likes.
When you combine Walmart’s attempts to attract young shoppers through viral videos with the technology and expertise Microsoft can offer, you have a strong partnership — on paper.
The feeling among analysts, however, is that any deal may not be guaranteed to boost Microsoft’s share price.
As reported by MarketWatch, Kirk Materne, analyst with Evercore ISI, acknowledged in a recent note that TikTok presents a big market opportunity for Microsoft, especially when it comes to advertising.
However, the company has to make sure that an acquisition doesn’t overshadow the hard work it has put into growing its cloud segment, especially cloud-based enterprise software.
Materne also cited potential problems with trying to get the product to connect with older demographics, although a tie-up with Gen Z-focused Walmart could obviously alleviate any such concerns held.
Daniel Ives, senior equity analyst at Wedbush Securities, believes a successful acquisition could add $200bn to Microsoft’s market capitalisation over the next few years. A deal could “give [Microsoft] a crown jewel on the consumer social media front at a time that other FAANG peers are under massive regulatory scrutiny with anti-trust concerns swirling,” he wrote in a note to clients seen by Barron’s.
Here’s the deal
At the start of August, Ives said there was a 75%-80% chance of a deal being approved. However, this is currently looking a bit optimistic.
Given the geopolitical tensions between China and the US, the situation is constantly changing. The latest development is a new technology export rule that was introduced by the Chinese government during the last weekend of August.
“This is clearly directed at slowing down ByteDance’s deal negotiations in this game of high-stakes poker,” wrote Ives in a separate note.
“With TikTok’s key algorithm at play, ByteDance will likely now need to go through a licensing procedure around the need to transfer software code from China to the US.”
Microsoft and Walmart may be the frontrunners to snap up TikTok, but there are other players that shouldn’t be ruled out just yet.
Oracle [ORCL] is the other major contender for the app. It’s been argued that the multinational software company, best known for Java, could have an advantage over Microsoft and Walmart. Larry Ellison, Oracle’s co-founder and CTO, has been a vocal supporter of US president Donald Trump which could help in negotiating a price with ByteDance. How TikTok would fit into Oracle’s existing business remains to be seen, however.
The last thoughts on the matter of a Microsoft-Walmart-TikTok deal should come from Bill Gates himself.
In an interview with Wired, published on 7 August, the Microsoft co-founder said: “Who knows what’s going to happen with that deal. But yes, it’s a poison[ed] chalice. Being big in the social media business is no simple game.”
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