Square (Nasdaq: SQ) bought a majority stake in Jay-Z's music streaming service Tidal for $297 million. Artists in Tidal will retain a stake in the company. The deal has brought considerable skepticism especially as Square CEO Jack Dorsey and Jay Z are friends.
Many skeptics see the deal as a bailout for Tidal which was struggling to gain traction against other offerings like Spotify (Nasdaq: SPOT), Apple (Nasdaq: AAPL) Music, and Amazon's (Nasdaq: AMZN) Prime Music. Others see the deal as Square creating tools for artists just like it has done for small businesses through its platform.
Deal Details
In a tweet-storm, Dorsey signaled that he understood the skepticism by asking a rhetorical question: "Why would a music streaming company and a financial services company join forces?!" Dorsey believes that Square's products can help artists generate more income. The deal also gives a board seat to Jay-Z.
Square has a history of poor acquisitions which fail to move the needle. The most notable example is a food-delivery company, Caviar which was sold to DoorDash (NYSE: DASH) in 2019. The Tidal deal at first glance seems similarly suspect especially as there is little crossover between the two industries.
However, there are some positives. For one, Tidal is less than 1% of Square's market share so it'll have a little long-term impact. Second, Square's primary task is to increase its user base. This could get easier if it's associated with popular artists and could offer free streaming as an incentive to users.
Another possibility is that Square could use Tidal to bring music-based digital tokens to the market. NFTs (non-fungible tokens) have become the hottest part of the crypto market, and this would give Square an entree into this market.
Stock Price Outlook
Companies tend to get criticized for taking risks and for playing it safe. While there are no simple synergies with Square and Tidal, the deal isn't as bad as it looks at first glance. In a sense as a user acquisition play, it could be much more efficient than typical marketing campaigns.
Over the last couple of weeks, Square's stock is down by 35%. This could be a good buying opportunity for anyone who believes in its long-term potential. It has been a victim of the sell-off in all high-multiple stocks. Those with solid fundamentals like Square are likely to bounce back once market conditions normalize.