Hey everyone and welcome back to another
innovative investment idea!
My name is Dave and in today's video,
we'll be taking a look at the Walmart
and Microsoft cooperative bid to acquire TikTok
one of the world's leading social media
platforms and what the move could
potentially mean for both companies from
an investment perspective
if and when the acquisition goes through.
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so with all that said let's dive right
in.
If for some reason you have no idea what
TikTok is, it is an app used to create
short music dance and comedy videos of
somewhere between 3 to 15 seconds
with the option to also stitch together
multiple clips for a grand total of 60
seconds.
The platform is popular amongst
millennials and especially Gen
Z in comparison to other social media
platforms
which appeal to a wider audience
generally speaking.
To provide additional context, ByteDance,
the company which developed TikTok,
originally released an app under the
name Douyin into the chinese market in
late 2016
to the tune of 100 million users and
more than 1 billion videos viewed every
day
during the first year alone. In an
attempt to capture the global audience
and capitalize on its success,
in 2017 the company then released an
international version of Douyin
under the name TikTok, and throughout
both 2018 and 2019
became the most downloaded app on
Apple's App Store, leaving Facebook,
YouTube and Instagram in its wake.
In fact, many media outlets have cited
TikTok as the seventh most downloaded
mobile app of the decade
between 2010 and 2019, a remarkable feat
considering it has only been available
for the final three or so years of that
time span.
Now, why is all this relevant you might
ask? So on August the 7th
2020, President Trump issued an executive
order to ban the social media platform
from operating within the US, on the
ground to protecting the data privacy of
american citizens.
while controversial the order remains
consistent with the administration's
long-standing political battle with the
world's second largest economy
which started in 2018 as a trade war of
tariffs on imports
but eventually did culminate in the
outright ban of huawei phones and 5g
infrastructure
as recently as may or 2019 the move can
be viewed as a pre-emptive strike
against the ccp
who a few years earlier on june 27 2017
enacted a national intelligence law
essentially binding corporations
operating within china
to the government itself to briefly
explain the spirit of the law
chinese and in some cases foreign
citizens and organizations operating
inside china
could be forced to provide access
cooperation or support
for beijing's intelligence gathering
activities obviously the amount of data
which social media apps in general
collected about its users is tremendous
not just tick tock specifically as they
are able to access a phone's gps
location
the messages sent and received are used
to search history and so on
and clearly this was considered a matter
of national security in the eyes of the
us administration
in response to the ban white dance
launched a council lawsuit on
august 24th challenging the u.s
government's accusations
that it is sharing data with the chinese
government and as part of the filing
revealed that tick tock's current active
worldwide users are now just shy of 700
million
with more than 100 million of those
living within the us
the growth has been staggering to say
the least with the amount having
increased eightfold
since january 2018. notwithstanding the
outcome of the counter lawsuit
the original executive order set a hard
deadline of september 15th for tick-tock
to find an american buyer
or cease and desist all operations
within the us entirely
while there is no doubt a rich tapestry
of motives at play here
at least two clear goals have come to
light with regards to this decision
firstly a percentage of the proceeds
from the sale must be sent directly to
the coffers of the us treasury
department
and secondly all of the past and future
user data
must be securely transferred to an area
outside of the ccp's jurisdiction
in a turn of events which will surely
complicate matters further
china's ministry of commerce revealed
late on friday august 28th
that the ccp had expanded its list of
technologies subject to export controls
to include new rules relating to
artificial intelligence and algorithms
the update was surprising to say the
least as a list had not been changed in
over a decade
since 2008 in fact but was surely a
power move in retaliation to trump's
executive order
while the content and data about a user
is extremely valuable
the actual secret source to any social
media platform
whether it be tik tok facebook or
youtube is the underlying machine
learning and algorithm
which can determine what content is
relevant to which users
and can recommend similar or related
content on the fly
that is to say most of tick tock's
intrinsic value moving forward
is likely to reside in the millions of
lines of code which keep the platform
running
and less on the existing data already in
its database from a purely
entrepreneurial perspective
of course national security experts will
disagree with the previous statement
it is difficult to know the exact
repercussions of this change from the
ministry of commerce and how it might
affect a potential sale
but time will ultimately tell however
assuming the ccp does not prove to be an
insurmountable hurdle on the way to a
potential sale
the deal itself is estimated to be worth
somewhere in the neighborhood of 20 to
30 billion us dollars
and will also include tick tock's
canadian australian and new zealand
operations
the scale of the transaction and the
particular commodity at stake
means that only a select number of
companies with the resources are
potential suitors
but so far walmart in conjunction with
microsoft have risen to the top
as the likely victors in the bidding in
fact daniel ives
managing director and technology analyst
at wedbush securities
has given the coalition's bid an 85 to
90
chance of going through microsoft should
be able to handle the data security
and provide technological expertise
while walmart stands to benefit from the
platform's reach to expanded sales
i'll discuss the benefits for both these
parties in more detail shortly
oracle is the other name said to be in
serious contention as a potential suitor
as a solo act
but that partnership seems less than
ideal given the expertise in mostly
cloud computing and databases
as they clearly lack the know-how to
capitalize on the marketing and
e-commerce side of tiktok
it is undeniable that co-founder larry
ellison has tremendous political ties to
trump as a known benefactor
throughout the 2016 presidential
campaign but that alone might not be
enough to move the needle
given what's at stake in fact according
to the following article by the new york
times
microsoft president brad smith has
already successfully engaged in an
influence campaign on behalf of
microsoft
in an effort to win over politicians and
lawmakers in washington
and to greenlight their bid for
tick-tock if slash when that comes to
pass
putting them on potentially even footing
his oracle in terms of political sway
the irony here is that microsoft
nowadays seemingly has the ability to
influence and win over the very
government
that was so hell-bent on pinning
antitrust lawsuits against it
throughout its formative years only a
few decades ago
as a matter of fact let's quickly go
through each of the usual suspects
to ascertain why they are unlikely to
acquire tick-tock
or even be interested in bidding to
begin with and why walmart and microsoft
should almost certainly be considered
the favorites
so starting with the most obvious
candidate mark zuckerberg and company
owners of the world's already most
popular social media platforms
facebook instagram and whatsapp with the
combined nearly 3 billion monthly active
users
the company has the technological
expertise and infrastructure in place
to leverage both digital advertising and
e-commerce but unfortunately
are also under extreme scrutiny for
antitrust
adding tick-tock to their portfolio
would almost certainly draw more
unwanted attention
and give politicians extra leverage in
punishing the tech giant's dominance
and more ammo to push for an eventual
breakup of its monopoly
so it's probably safe to say they are
out of the picture
in fact along the same lines is probably
prudent to also rule out amazon and
google from the bidding as well
as they are both increasingly coming
into the antitrust spotlight alongside
facebook
since the doj is bearing down on its
alleged anti-competitive practices over
the years
accusing the tech giant of ranking in
search results to favor its own products
and now even its home state of
california is opening its own
investigation
wading into the middle of an american
chinese political war zone
would probably be ill-advised google ceo
sundar pichai has in fact already gone
on record
to publicly declare that google is not
actively pursuing tick tock
of course it remains to be seen whether
this could all just be rhetoric and a
technique to throw the media and
competitors off the trail
but there does appear to be too much
tension for this to be the eventual
outcome
with trump leading the charge on the ban
of tick-tock and the well-documented
unresolved beef between he and amazon's
ceo jeff bezos
ranging on a variety of topics such as
the integrity of the washington post
the lack of taxes being paid by amazon
and the exploitation of the usps to
deliver packages to its customers
it would be extremely surprising for the
us administration to sign off on a deal
that would allow amazon to expand even
further and become a significant player
in the social media scene
in addition to its existing businesses
apple could be viewed as another
potential candidate to acquire the
social media platform
given its technological prowess and with
over 200 billion dollars of cash on hand
it clearly has the resources but the
match doesn't appear to be optimal
as social media platforms generally
operate across multiple devices and
platforms
and unless the company decides to
deprecate android support for instance
which would essentially cripple tick
tock's growth and reach potential
the application simply does not
complement or leverage any of apple's
traditional services or offerings
so apple is probably not a great fit
either
while companies like twitter and perhaps
snapchat would make great homes for tick
tock with similar short form social
interactions
their market caps are very similar to
tick tock and neither have much
firepower in the way of cash
and therefore it would be extremely
unlikely they could make a serious play
at acquiring the app
so really given the state of the game it
really exemplifies why microsoft is only
real threat to acquire tick tock from a
technology viewpoint
with walmart a worthy running mate to
handle the commercial aspects of the
platform
once again assuming the ccp does not
prevent or interfere with the potential
deal
okay so let's get into the weeds a
little why should microsoft want to
acquire tick-tock
the first credible argument is that
microsoft has already pivoted away from
being heavily dependent
upon the winner's operating system as
his primary revenue driver
and a simple purveyor of enterprise
software such as office and teams
and has actually built a
well-diversified business portfolio
under the leadership of satya nadella
including amongst other things
linkedin a social network for
professionals it's a zero cloud platform
second only to amazon's aws skype
xbox gaming and it has even established
itself as a player in the hardware
market
with its surface line of products tick
tock would not only serve to bolster its
diversified offerings
but also allowed to legitimately compete
against silicon valley rivals facebook
and google
in a very serious way the second reason
is the growth potential with tick-tock
which could be enormous if handled
correctly
as the app itself is only three years
old and as we've previously seen
is far from reaching user saturation as
it is still undergoing massive user
growth
while 30 billion might seem like a lot
for an acquisition keep in mind the
following
google's acquisition of youtube in 2006
costs a then whopping sum of 1.65
billion
which has now become a cash cow and
generated over 15 billion
alone in the year 2019. another example
is facebook's acquisition of instagram
in 2012 for a cool billion
in what many thought was an overpay for
an image sharing app
but that app generated a reported 20
billion in 2019 in ad revenue
it's impossible to predict what kind of
revenue growth could be possible with
tick tock
but perhaps a fair comparison is
microsoft snapping up linkedin for 26
billion
back in 2016 while microsoft has not
seen the kind of returns either facebook
or google have had with their respective
acquisitions
as we can see from statista linkedin has
been a fast-growing revenue generator
for microsoft in its own right
growing from just over 2 billion in 2017
to just under 7 billion last year in
2019
it's probably safe to say that 30
billion would be a fair investment
when taking the longer view and
amortizing its value over a lifetime
if you've watched any of the channels
previous videos you would be aware that
i've long advocated that data is
the most valuable commodity in today's
corporate landscape
with this acquisition microsoft
immediately gains the ability to augment
its enormous existing case of corporate
user data
with that of tick tock a source of pure
consumer data
which would immediately catapult
microsoft into the same stratosphere
as its peers in building a very accurate
and complete user profile
across society the data will essentially
give microsoft a direct line to millions
of millennials as well
paving the way to influence an entirely
new generation of potential customers
to purchase as products in the years to
come
while there are probably a plethora of
other valid reasons the final reason
that we'll discuss in this video anyway
is that tick tock's machine learning
algorithm could potentially help
unlock microsoft's previous attempts at
developing a viable artificial
intelligence
to compete with its peers google apple
and amazon
its search engine bing and virtual
assistant cortana
have all flopped comparatively speaking
but by studying the secret source of the
highly successful tiktok algo
could help its engineers understand
microsoft's own shortcomings
and lead to the development of a more
viable product the last point here is
slightly speculative
but in my opinion is something worth
mentioning
okay so the other half of the equation
is to examine why walmart would want to
acquire tick-tock
the main benefit is the platform's
untapped ability for product placement
but it could also provide users a direct
means to browse and purchase items they
see advertised
or incorporated into various videos they
watch
in fact bike dance already has
implemented these exact features within
do yin
whereby users are able to click product
ads adjacently placed beside or at the
bottom of each video
and are then directed to a feed
consisting of other videos containing
ads with similar or related products
by collecting data on users interests
tastes and spending habits
walmart could very well begin targeted
ad campaigns to sell even more products
and augment it's a really impressive 500
billion plus in sales revenue
walmart would simply just need to
replicate the model du yin has already
proven works
or even incorporate shades of instagram
as another attack
vector the second reason is walmart's
desire to expand into e-commerce
embodied by its impending launch of
walmart plus
for years walmart has watched amazon
flourish and dominate as an online sales
juggernaut
and while walmart has been doing just
fine in the brick and mortar space
there's no other way to put it that it
has missed out on millions if not
billions of dollars
of potential revenue from the online
segment
with a high profile acquisition such as
tick-tock it would immediately give
itself to ammo to at least compete
and pry away market share from the likes
of amazon and start to reinvent itself
as a forward-looking company
that is prepared for future generations
of shoppers who may or may not ever set
foot in one of his physical stores
the third and final reason is simply ad
revenue
just as youtube and instagram are
churning over billions and billions of
dollars in digital advertising as
previously discussed
walmart could stand to gain a tremendous
amount of dollars within the fast
growing segment of digital advertising
and could see it accelerate its growth
and increase its already hefty roi to
shareholders
it could also be an opportunity for
walmart to further diversify its
investment streams
which is always a solid business
strategy
so in closing what would the acquisition
of tick tock ultimately mean for either
walmart or microsoft investors
the answer is simply that both would
benefit a great deal and there appears
to be very little downside if at all
there is obviously some risk that
integrating tick-tock into microsoft
infrastructure
is not technically feasible although
walmart's products won't end up selling
very well on the platform for whatever
reason
and of course there is still the looming
presence of the ccp
which could prove to be problematic and
even the us administration could
play a role before and after the deal
but for all the reasons discussed
investors or potential investors
should not be surprised to see a sudden
and positive market reaction
upon news that a deal has been reached
even now prior to any sort of
acquisition
both stocks already hold tremendous
value as a combination of long-term bets
and underrated dividend plays and
tick-tock falling into their laps would
only serve as icing on the cake
if you're already a holder of either or
both of these stocks you probably don't
need reminding that they're quality and
safe prospects in any portfolio
but if you're on the sidelines or
contemplating an entry i think now is a
great time to open a position
in anticipation of what looks to be a
sure thing and you'll thank yourself for
the years and decades to come
with or without a tick tock deal even
materializing
that about wraps it up for this video
what are your thoughts on the
acquisition of tick tock
and will you be a buyer or seller
microsoft a walmart in the near future
post them down below in addition to any
other questions or comments
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before i go click on the top video here
to take a look at a breakdown of the
teledoc and lavonga merger
in what would be the largest e-health
company in the world or
alternatively down here for a look at
lemonade a company using artificial
intelligence to disrupt the age-old
insurance industry
as always thanks for watching and i'll
see you in the next one
