Oracle's 12.5% Stake in Tiktok Global to Rev Up Cloud Market

President Donald Trump recently announced that ByteDance, TikTok app’s parent company, has received "a tentative approval" for a deal with the U.S. Government. Per the agreement, Oracle ORCL and Walmart WMT will invest to acquire 12.5% and 7.5%, respectively, of the newly formed TikTok Global business.

TikTok is now devising a new company, TikTok Global, through which all TikTok services will be offered to users in the United States and most of the users in the rest of the world.

Moreover, Oracle will become TikTok’s secure cloud provider, which will intensify competition in the cloud space. This deal will aid Oracle to take the fight to Amazon’s AMZN Amazon Web Services (AWS), the dominant cloud provider, and Microsoft’s MSFT cloud computing arm, Azure, which only trails AWS in the cloud market.

Following the development, shares of Oracle are up more than 3.5% in the pre-market trading on Sep 21. Meanwhile, shares of Microsoft and Amazon are down around 2% in the pre-market.

Year-to-Date Price Performance

TikTok Global Set for an IPO

Per the agreement, TikTok Global will have an IPO within a year’s time and be listed on a U.S. Exchange, post which its U.S. ownership is projected to grow over time.

This will enable TikTok Global to continue providing its American users’ (over a hundred million) access to TikTok, and rev up competition in the social networking market. Per a Bloomberg article, ByteDance is pursuing a valuation of $60 billion for TikTok, “citing a person familiar with the matter.”

It remains to be seen on how terms evolve in the days ahead and become clearer. TikTok Global is anticipated to create more than 25,000 new jobs in the United States and “pay more than 5 billion in new tax dollars to the U.S. Treasury.”

Notably, TikTok Global will be majority owned by American investors, which includes both Oracle and Walmart. Further, it will operate as an independent U.S. company with headquarters in the country, and Americans making up four out of the five board of directors.

It must also be noted that “all the TikTok technology will be in possession of TikTok Global and comply with U.S. laws and privacy regulations.”

Oracle’s Autonomous Database Strength to Boost Cloud Push

TikTok’s unparalleled strength in user base and the resultant huge database is a key catalyst and the latest deal raises the odds in favor of Oracle to prosper in the cloud market.

The popular app, which allows people to record and edit short videos witnessed rapid momentum during the pandemic, driven by shelter-in-place guidelines and stay-at-home wave.

As mentioned, the app boasts an estimated 100 million users in the United States alone. Moreover, per data analytics firm Sensor Tower report, TikTok stood out as the most downloaded non-gaming app globally for August 2020 with more than 63.3 million installations, up 1.6% year over year.

China-owned music-video app is looking for survival amid backlash from the United States, India, Japan, the European Union, and Australia.

Oracle’s deal win and confirmation from President Trump reflects the trust it has earned, on both sides, from perspective of ByteDance and the U.S. Government.

Oracle, currently carrying a Zacks Rank #3 (Hold), is making every effort to enhance functionalities of cloud-based applications, which is encouraging adoption. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These initiatives are also expected to provide the company an edge in the Database-as-a-Service market and reinforce its competitive position against AWS.

Moreover, the next-generation autonomous database launched by Oracle, supported by ML, is gaining traction. In first-quarter fiscal 2021, Oracle added new Autonomous Database cloud customers. New product introductions are likely to bolster growth in this category. Markedly, autonomous database in Gen2 public cloud infrastructure is witnessing rapid adoption.

Oracle’s latest Exadata Cloud@Customer service offering is also gaining traction among on-premise customers.

Noteworthy deal wins of Oracle Cloud Infrastructure (OCI) services and autonomous database include Xactly, United Breweries of India, Safaricom PLC, Schneider Electric, McDonald’s, Rinna, Polycab India, Arterra Wines Canada, and Lahore University of Management Sciences.

Management remains optimistic that Zoom Video Communications ZM and 8x8 EGHT are utilizing OCI services to enhance video meeting solutions in a secure manner amid explosive growth in user base.

Markedly, autonomous database consumption revenues improved 64% and annualized consumption revenues for Oracle Cloud Infrastructure (OCI) services soared 130% during fiscal first quarter.

Competitive Scenario

Amazon, currently carrying a Zacks Rank #3, is the leading provider of cloud infrastructure as a service to enterprise customers. The expanding customer base of AWS driven by its strengthening cloud offerings will continue to aid Amazon's dominance in the global cloud space.

Even more encouraging is the fact that AWS generates much stronger margins than the traditional retail business, which should remain a positive for the company’s profitability as it continues to grow in the mix.

Microsoft is benefiting from momentum in Azure, and impressive growth in clientele triggered by coronavirus crisis led work-from-home, online learning wave and tele healthcare trends. Furthermore, it is well poised to expand the total addressable market through acquisition of GitHub.

Also, Azure’s increased availability in 58 regions globally, is expected to strengthen Microsoft's competitive position in the cloud computing market. Microsoft currently carries a Zacks Rank #3.

Per a Canalys report, Microsoft’s market share in the cloud services space increased to 20% in second-quarter 2020 from 18% in the prior-year quarter. AWS market share remained unchanged at 31% for second-quarter 2020 on a year-over-year basis.

Notably, per Synergy Research Group’s data on second-quarter 2020, Oracle’s market share of 2% in cloud infrastructure services market, trails Amazon’s 33%, Microsoft’s 18%, Google’s 9%, Alibaba’s 6%, IBM’s 5%, and salesforce’s CRM 3%.

Nevertheless, Oracle’s 12.5% stake in TikTok Global business, is likely to be a game changer. It positions the company well to rev up competition in the cloud domain and ensnare more market share, in the days ahead.

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