Microsoft (NASDAQ:MSFT) has revealed that it currently in talks to buy the U.S. operations of TikTok, the popular Chinese video application which has come under scrutiny from the U.S. government due to concerns of privacy and ties to the Chinese state.  Although there are a lot of unknowns at the moment, purchasing the app could be a bold yet potentially lucrative bet for Microsoft, which has largely pivoted to enterprise software and cloud computing over the last few years.
So why exactly does Microsoft want to buy TikTok and what would be a fair price? Our interactive dashboard analysis What’s TikTok USA Worth? has more details on TikTok’s potential valuation and a comparison with rivals Facebook (NASDAQ:FB), and Snapchat (NASDAQ:SNAP).
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The online ad market is growing fast, expanding by about 16% in 2019, per eMarketer. While growth is likely to slow this year, the market could rebound strongly in 2021, with growth projected at about 17%.  By acquiring TikTok, Microsoft could have a shot at becoming a meaningful player in the digital advertising space – taking on the likes of Facebook and Google. TikTok reportedly has as many as 80 million users in the U.S. and its base has been growing fast over recent months with the Covid-19 pandemic forcing more people to go online to socialize and entertain themselves.
Although TikTok has not yet started to meaningfully monetize its users (we estimate average revenue per user to be roughly $1 per quarter, versus about $33 for Facebook), it certainly has a lot of potential. TikTok users appear highly engaged, spending over 50 minutes on the app per day. That’s more time than Facebook and Snapchat users, who spend between 30 to 40 minutes.  TikTok’s demographic, which is significantly skewed towards teens and young adults, could also prove valuable to marketers.
That said, the acquisition could also come with some risks. Most social media companies gather user data, build profiles, and use this to better target ads. These mounting privacy concerns have increased regulatory scrutiny around companies such as Facebook and Google. Microsoft would need to address these issues if it wants to go ahead with this major bet in the social media and advertising space.
So How Much Is TikTok USA Worth?
We estimate that TikTok’s U.S. operations could be worth about $20 billion, based on projected U.S. Revenues of about $500 million for 2020 and a P/S multiple of 40x. While this multiple is well above the P/S multiple for Facebook and Snap (which were valued at about 21x and 24x revenue at the time of their initial public offerings), we believe this is justified, given that this is just for the U.S. operations, which likely has much better revenue potential. For perspective, Facebook’s North American ARPU is over 4x its global ARPU.
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