Why Activision’s deal gives Microsoft stock 20% more: analysts

  • Microsoft’s blockbuster deal for Activision Blizzard has taken the tech world by storm.
  • The move bolsters the company’s gaming business and makes it an early leader in the metaverse.
  • Analysts share their thoughts on the acquisition and Microsoft’s next move.

Game on, Meta.

That’s the message Microsoft seemed to be sending rival, formerly known as Facebook Inc., after announcing plans to take over video game giant Activision Blizzard for $68.7 billion. If approved, the all-cash acquisition will be the largest transaction ever in the tech industry.

The move, if approved, will bolster Microsoft’s gaming business, which is poised to become the third-largest by revenue behind Tencent and Sony, while making the Redmond, Washington-based company a serious player in the metaverse – a futuristic concept of immersive 3D virtual. worlds.

Microsoft has dabbled in mixed reality with software features and its HoloLens headsets, but is now making its boldest push yet in the potentially lucrative space — and this deal could put it ahead of the race to the next. big thing.

“I think the game is at the forefront and


diffusion

. I think that’s the goal,” Dan Ives, senior equity research analyst at Wedbush Securities, said in an interview with Insider. “But I think it arguably puts Microsoft ahead of Facebook when it comes to metaverse strategy. .”

Insider sat down with Ives, three other Microsoft analysts, and an Activision Blizzard analyst to discuss why this deal happened, how it shaped the race to build the Metaverse, and what lies ahead for Microsoft stock.

The right time, the right asset for Microsoft

The timing of the deal was no coincidence, analysts say.

Activision Blizzard was in turmoil following a sexual harassment lawsuit. CEO Bobby Kotick, who has led the company for 30 years, has come under scrutiny over claims he hasn’t done enough to prevent what the lawsuit called a culture of ” ubiquitous frat boy”. The shares were down 30% from pre-trial levels.

Microsoft, which has a two-decade track record of investing in games, had money to burn. The tech giant had more than $130 billion in cash, according to its latest quarterly report, and its shares had increased almost fivefold over the past five years.

With Kotick in the hot seat, Microsoft CEO Satya Nadella saw a “window of opportunity to acquire a unique asset” and took advantage of it, Ives wrote in a Tuesday note. Activision Blizzard’s sexual harassment scandal catalyzed the deal, The Wall Street Journal reported.

The deal, which could be completed as early as June 2023, is shaking shareholders of Microsoft’s biggest rival. Shares of Sony fell on the news, with US-listed shares falling 12.8% over the past two sessions, while Japanese shares fell 13%.

Investors fear Activision Blizzard’s lineup — which includes franchises like ‘Call of Duty,’ ‘Candy Crush,’ ‘Diablo,’ ‘Overwatch,’ and ‘World of Warcraft’ — will make Microsoft an even more powerful force. in the game.

“They have very good intellectual property in the gaming industry, and as the saying goes, content is king,” said Derrick Wood, enterprise software analyst at Cowen. “And Microsoft has been very clear that the gaming market is of great interest.”

Playing online video games through Microsoft’s Xbox console requires Xbox Live, which costs $60 per year. The company also offers Game Pass, a monthly subscription service that provides access to over 100 games for $10 to $15 per month. Since its launch in June 2017, the service has amassed 25 million subscribers, but there’s plenty of room for growth.

Activision Blizzard has nearly 400 million monthly active users, and while not all of those gamers will start paying for Game Pass, there’s a good chance they will. And every time a new Activision game comes out, Microsoft can hook up a new group of customers who could sign up for Game Pass if they want to keep playing the game.

“Let’s say a hundred million people play ‘Halo’ online, for free: will that get 5 or 10 million of them to convert to Game Pass? Yeah, it really could,” Michael Pachter, analyst at Wedbush Securities, which covers Activision Blizzard and other video game companies, said. “I think that’s the big plan.”

Other parts of this “big plan” for games include more mobile business, growing in-game item sales, expanding into China, and of course, continued game sales.

“Microsoft will maintain Activision’s core business model and continue to sell all of this content,” Pachter said.

The Metaverse Is A Mystery, But Content Will Be Key

Some benefits of Microsoft’s acquisition of Activision Blizzard may not materialize for years.

Every analyst Insider spoke to said Microsoft’s desire to “plant a flag” in the metaverse, in Wood’s words, was a driving force behind the deal. The future of technology is murky and bright at the same time; no one knows exactly what the Metaverse will be, but the consensus is that it will be big. Analysts said content would be key to keeping users engaged.

“This whole emerging area of ​​the metaverse — I would say no one really knows because there are conflicting definitions and capabilities — but Microsoft is focusing on multiple levels in there,” said Mark Moerdler, senior research analyst at Bernstein Research. . “And they believe that gaming and gaming capabilities and streaming, and Azure, and AR, and VR, and AI, and everything else are going to all converge.”

Kirk Materne, software analyst at Evercore ISI, said the Metaverse could eventually be an entire virtual world that brings communities together online, while Ives of Wedbush said it would likely start as a gaming hub. Content from Activision Blizzard will help Microsoft get a head start in expanding its virtual empire into new territories.

What’s next for Microsoft stock?

It is not surprising that an agreement of unprecedented magnitude was followed by an unpredictable reaction.

Microsoft shares have tumbled since the deal was announced, going from a 2% loss to a 1.8% gain an hour later before reversing to close lower. Shares rose 3.6% on Wednesday before giving up most of those gains as the broader market retreated.

To cut through the noise, Insider has compiled each of the four aforementioned Microsoft price targets and analyst ratings, along with detailed commentary on where the stock will go.

Comments are closed.