Due to President Donald Trump's threats of banning TikTok, ByteDance seems likely to sell in the coming weeks. It's been rumored that Microsoft (Nasdaq: MSFT) is going to buy TikTok for $50 billion. This raises the question of whether this is good value for TikTok and whether it will be accretive for Microsoft.
TikTok's Growth
TikTok has 800 million active users globally. For months, it's been one of the most popular apps for iPhone and Android devices. It's certainly the fastest growing social network, and it's remarkably sticky, as the average user spends 52 minutes a day and opens it between six to eight times a day. It's in the early stages of monetizing its user base but has momentum.
In 2019, TikTok's revenue was $180 million. It's growing revenue at 120% on a year over year basis. Its major source of revenue is ads, but also some portion comes from in-app purchases. TikTok has hired the head of advertising from Facebook (Nasdaq: FB) to spearhead its monetization efforts. The recent history of Internet apps shows that if a company has a large user base, then the ad dollars will flow. Ad campaigns on the app show high clickthrough rates compared to other types of Internet advertising.
In China, ByteDance's TikTok-like app has been operating even longer and accounts for 23% of the digital ad market. This gives it a considerable upside in the U.S. TikTok's 2020 revenue is projected to hit $1 billion, and the company is forecasting $6 billion in revenue for 2021.
Comparison to Snapchat
Snapchat (Nasdaq: SNAP), Twitter (Nasdaq: TWTR), and Instagram are convenient comps for TikTok, although there are significant differences. Snapchat is valued at 15 times its 2020 revenue of $2.1 billion which gives it a value of $33 billion, while TikTok is being valued at 50 times its 2020 revenue.
However, TikTok is growing much faster than Snapchat, as it's forecasting a 500% increase in revenue over the next two years. In contrast, Snapchat is expecting revenue growth of 30% in 2021. Snapchat also has 230 million daily active users, with 15% growth. In contrast, TikTok's user growth base is significantly larger and growing faster.
Effect on Microsoft
Given this massive potential, TikTok could be a steal for Microsoft at $50 billion. Facebook's Instagram launched a TikTok knockoff - Reels and gained $40 billion in market cap. There's also the fact that the best market opportunities come due to forced selling which ByteDance would have to do due to Trump's antagonism towards China.
For Microsoft, $50 billion is a drop in the bucket, given its $1.6 trillion valuation. It would also give it a significant consumer-facing platform as its growth has mainly come from enterprise and selling to businesses. This would also assuage the government's antitrust concerns.
It's certainly a worthy gamble for TikTok given the app's size, growth, addictive product, and the fact that it's in the early stages of figuring out monetization. Given its AI-powered delivery of short videos, it seems to be the best-suited for ad delivery in an unintrusive manner. Microsoft whiffed on search and social, but it could get back in the game by nabbing TikTok.