How Google Could Acquire TikTok for $60 Billion, Win Versus Microsoft

by Trefis Team
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We think Google’s parent Alphabet (NASDAQ:GOOG) should buy the global operations of TikTok and take another stab at a social media play. But this time, make it count. Google’s Orkut – nobody remembers it – was so last decade, and Google Plus barely gained traction. However, the prize appears meaningful this time considering that TikTok, a fast-growing social media app with a highly engaged audience, appears to be up for grabs.

The Strategic Benefit To Google

TikTok has a young, creative, and highly engaged audience. Sure, most of TikTok’s audience is likely already on Google, but Google could leverage the app to draw them deeper into the Google ecosystem – YouTube,  of course, but also into Google Drive, Docs, Sheets, and broadly the Chrome and Android universe. The move should also help Google solidify its ad business without letting Facebook and smaller players like Snap take more of it. For perspective, video ads appear to be the fastest-growing ad segment for Google. YouTube ad revenues grew at an annual rate of 36% over the last two years, roughly twice as fast as Google’s Search and other ads business. It’s possible that a TikTok deal could help accelerate growth, considering its younger audience. Separately, TikTok is apparently a large customer of Google’s Cloud business – it agreed to buy over $800 million in cloud services from Google in 2019, and this could help make integration easier. [1]

But why does Google need to acquire another company, anyway? Think about it this way, with $162 billion in revenue for full-year 2019, Google’s top line has grown at an average of 21% in the last three years. To sustain even a 15% average growth implies it’ll need to create $200 billion in additional revenue over the next five years. Trefis had outlined the case for Google to acquire Tesla for around $1,200 per share when the latter’s stock was trading around $800 to create growth. TikTok is, of course, no Tesla – but the growth potential is real, and the social media landscape no small potatoes.

Talking Dollars And Cents

How much should Google pay for TikTok? TikTok is projected to post global revenues of about $1 billion in 2020. While its management expects sales to soar to $6 billion in 2021, that appears aggressive, and we believe that a revenue figure of about $4 billion might be more realistic. [2]

Now let’s look at a potential valuation. Snapchat’s parent Snap trades at about 10x  projected 2021 revenue, while Facebook trades at about 7x estimated 2021 revenue. If we assign a 15x multiple to TikTok, considering that it’s earlier in the growth cycle, this will translate into a valuation of about $60 billion for the company’s global operations. Google should be able to justify this price to its investors, given its track record of monetizing YouTube. Although YouTube is a more mature asset, we estimate that the company generates roughly $8 per year in ad revenue per global user and over $30 per year from each U.S. user. Funding a deal shouldn’t be a problem, given that Google has upwards of $100 billion in cash.

The Microsoft Question 

Now Microsoft is currently negotiating to purchase TikTok’s U.S. operations, with a September 15th deadline at a valuation that is reported to range from $10 billion to $30 billion. [3] However, this is far from a done deal. There isn’t much precedent as to how a social media app, which connects users across the world, will be broken up into an independent company based on geography, and this could be a messy transaction for both parties. However, Reuters reported in late July that TikTok was actually weighing a sale of its entire global operations that include its U.S. operations, meaning that it could very much be open to a deal from Google to buy the global assets. This would possibly be a more straightforward transaction and one that TikTok’s Chinese parent company ByteDance could actually prioritize.

Risks For Google

If Google buys TikTok, there would still be multiple risks. Specifically, 4 key risks. 3 of these risks are operational for Google: the risk of losing TikTok talent/engineers and product managers due to a culture mismatch, the risk of losing TikTok users, and the risk of not being to monetize TikTok properly. While these are key operational risks, as we argued above, with a history of successful YouTube acquisition, Google is likely better positioned than others to mitigate these risks while capturing the opportunity.

But the 4th risk is potentially a dealbreaker – an acquisition being seen as anti-competitive. Google already has YouTube in its product portfolio, and the company is already under considerable scrutiny from lawmakers and regulators due to its market power in the digital advertising space. Google’s attempt to increase its power in social media and video ads with a TikTok deal will face substantial resistance from regulators.

But is that reason enough for Google to pass up a deal that could meaningfully move the needle on its future growth? Guess we will need to wait and see if Google throws its hat in the ring with Microsoft for a winner-takes-all bout for TikTok.

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Notes:
  1. TikTok Agreed to Buy More Than $800 Million in Cloud Services From Google, The Information, July 2020 []
  2. Exclusive: ByteDance investors value TikTok at $50 billion in takeover bid – sources, Reuters, July 29, 2020 []
  3. Microsoft could buy TikTok for as much as $30 billion, CNBC, August 2020 []
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