Microsoft sees $95 billion boost on possible TikTok deal

Wall Street is doing a happy dance over Microsoft's talks to acquire TikTok.

The software maker's shares rose nearly 6%, or $11.53, on Monday, adding to gains on Friday after reports of the possible deal first surfaced. The jump added a whopping $95 billion to its worth — a clear sign that investors back what some experts say could be a game-changing transaction for a mature technology company like Microsoft.

Microsoft confirmed on Sunday night in a blog post that it is in discussions with TikTok's owner, Beijing, China-based ByteDance, about a possible acquisition, noting that it hopes to clinch a deal by September 15. Microsoft said CEO Satya Nadella spoke this weekend with President Donald Trump, who had been threatening to ban TikTok over its Chinese ownership, about the deal.

For Microsoft, TikTok's contributions in terms of sales would initially be minor. Although the social platform's clicky videos and ease of use have made it a phenomenon both in the U.S. and around the world, it's still small compared to Microsoft, which sports a market capitalization of $1.6 trillion and which had revenue of $143 billion last year.

By comparison, TikTok is expected to generate as much as $1.4 billion in revenue this year. Microsoft also appears to be only eyeing TikTok's U.S. business, as well as Canada and few others smaller markets.

Yet a deal for TikTok could help Microsoft turn the page on a series of acquisitions in recent years that range from modest successes to outright duds. Microsoft's acquisition of internet calling service Skype was a bust — one of a number of clunker deals. And its successful purchases of professional social network LinkedIn in 2016 and developer network GitHub in 2018 are more extensions of its business software division.

In all, only about a third of Microsoft's revenue now comes from its consumer business, and only a small portion of that is from direct sales to individuals. Microsoft's Xbox gaming system generated about $11 billion in sales last year. In short, TikTok would instantly lift Microsoft's consumer business and boost the company's growth.

Microsoft's sales are expected grow just 9% in the next year, down from 14% in the past 12 months and 23% three years ago. As more and more people shift to using free web-based applications, the company's consumer business is growing in the low single digits, or by about $2.5 billion last year. By comparison, Google owner Alphabet has grown at a 20% annual clip for the past few years.

TikTok's U.S. revenue alone is expected to reach $500 million this year, according to The Information, That's 10 times the $50 million it generated in 2019, when the U.S. accounted for just 20% of its business, Barron's noted. Based on that rapid growth, TikTok could triple Microsoft's consumer business within a year.

Buying TikTok would also turn Microsoft into a serious competitor in online advertising with Facebook, Twitter and Google's YouTube. Daniel Ives, one of Wall Street's most influential technology analysts, wrote in a note to clients that TikTok would be a "big bet" on the consumer social media market for Microsoft.

TikTok has 800 million monthly active users, including 80 million in the U.S., according to marketing firm Wallaroo. Facebook has 2.6 billion active users.

Microsoft's "consumer strategy remains in flux, and an aggressive acquisition of TikTok would be Microsoft throwing its hat in the ring and trying to compete with other tech giants such as Facebook in a new avenue of growth for the next decade for its consumer business," he said.

Despite these synergies, the regulatory and political risks around a deal remain significant, especially given the chilly relations between the Trump administration and the Chinese government.

Microsoft's play for TikTok comes as Congress scrutinizes the power technology companies have over data and users. Last week, the CEOs of Apple, Amazon, Facebook and Google faced a day of questions from lawmakers. Many said they thought Big Tech has become too powerful.

Microsoft's CEO was not called for the hearing, and the company, which was once widely seen as a monopoly, has avoided that kind of scrutiny in recent years.

"Microsoft has managed to avoid some of the regulatory scrutiny facing other large-cap tech peers, so it comes as a bit of a surprise that the company would put itself in the spotlight by aiming to buy TikTok despite Trump administration concerns about ties to China," UBS analyst Jennifer Lowe told investors in a report.