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Vivek Kumar
Sep 28, 2019 Palo Alto / CA / USA - Microsoft Logo on the facade

Given the strength of the asset, solid recent execution and multiple areas of synergies, a potential deal for TikTok’s U.S. operations could be a compelling strategic fit for Microsoft, said Morgan Stanley’s equity analyst, Keith Weiss, who gave a price target of $230 for the software giant’s stock.

Microsoft Corporation said on August 2 that it would quickly pursue discussions to acquire popular short-video app TikTok from Chinese internet giant ByteDance, and that it was aiming to complete the discussions no later than September 15, 2020.

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“With both rapid growth to >100 million users and a demographic rapidly expanding from teenagers into older users, TikTok could immediately make Microsoft a viable player in the consumer-oriented social media space (core Facebook has 247 million U.S. users), beyond the LinkedIn professional network, Morgan Stanley’s Weiss said.

While there are no reported financial details, Morgan Stanley said they looked at the range of potential financial impacts based upon figures cited in Reuters and The Information. According to a Reuters’ source-based story, the popular short-video app could do $1 billion in revenue in 2020 and $6 billion next year. The Information reported that the U.S. revenue could be $500 million this year.

“For simplicity, assuming a deal was announced before the September 15th deadline that closed on December 31st, and Microsoft acquired the US business only, which illustratively could grow from $500 million in 2020 to $3 billion in 2021 (500%), TikTok could add 2% inorganic growth to Microsoft’s model in CY21e,” the analyst said.

With a base-case forecast of $230, over 8% increase from Friday’s close of $212.48, Morgan Stanley target price under a bull-case scenario is $290 and $150 under the worst-case scenario. Several other equity analysts have also updated their stock outlook. Microsoft had its price target increased by JPMorgan Chase & Co. to $220 from $190. The firm currently has an overweight rating on the software giant’s stock.

Royal Bank of Canada restated a buy rating and set a $240 target price, up from $200. Barclays increased their price target on shares of Microsoft to $234 from $204 and gave the company an overweight rating. At last, Wells Fargo & Co upped their target price on shares of Microsoft to $250 from $205 and gave the company an overweight rating.

Thirty analysts forecast the average price in 12 months at $228.22 with a high forecast of $260.00 and a low forecast of $195.00. The average price target represents a 7.41% increase from the last price of $212.48. From those 30, 27 analysts rated ‘Buy’, three analysts rated ‘Hold’ and none said ‘Sell’, according to Tipranks.

“Strong positioning for public cloud adoption, large distribution channels and installed customer base, and improving margins support a path well beyond $1 trillion market cap. Durable double-digit NT rev growth is supported by Azure (winning in public cloud), data centre (share gains and positive pricing trends), O365 (base growth and ARPU uplift) and LinkedIn. GM % improvement, continued opex discipline and strong capital return lead to durable teens total return profile,” Weiss added.

“At 30x CY21e GAAP EPS, Microsoft trades at a premium to the S&P, warranted due to MSFT’s premium return profile. Multiple expansion will likely come from gaining comfort in the durability of commercial business gross profit dollars.”

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