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Activision Blizzard: Microsoft Acquisition Might Signal Continued Growth 

I am bullish on Activision Blizzard (ATVI) and believe it has room for growth. Although there is uncertainty surrounding Activision’s recent news of acquisition by Microsoft, it is still a top video game developer.

Investment Thesis

Activision Blizzard is one of the largest video game developers in the world. Its massive presence in the gaming space, combined with the recent acquisition by Microsoft (MSFT), shows tremendous opportunity. 

The company has strong fundamentals and a conservatively managed balance sheet. Activision increased assets through the profitable holiday season while maintaining similar expenses in 2021. With the recent acquisition news from Microsoft, expected to complete in 2023, Activision has significant tailwinds which will continue to drive the stock price up.

The video game industry expects to see an 8.17% compounded annual growth rate through 2026, and Microsoft has promised to improve ATVI’s workplace culture, attracting new talent. The company is a compelling long-term growth play despite concerns surrounding its corporate culture. 

Future Outlook

Activision continues to gain market share in the mobile, PC, and console game space through its familiar titles such as Call of Duty and World of Warcraft. In 2020, smartphone games accounted for nearly half of the video gaming revenue worldwide and allowed Activision to hold its position as a leading contender in the video game market. 

Elevated future price targets are confirmed by the recent news of the Microsoft acquisition. This presents a buying opportunity for bullish investors. Microsoft agreed to a purchase price of $68.7 billion or $95 per share, which is a ~20% premium to its current stock price of $79.

A logical question remains, why isn’t the stock trading at $95 trailing the acquisition news? Investor sentiment is likely determined by the fear that Microsoft may back out of the deal due to the workplace misconduct allegations.

On a conference call with investors after the announcement of the purchase, Microsoft’s CEO discussed how Microsoft has changed its cutthroat ways and how his team would do the same with Activision. 

Following the news of Microsoft acknowledging Activision’s workplace cultural shortcomings, an investment into Activision Blizzard seems less risky as Microsoft has addressed the main concern of the deal. Activision is a fundamentally excellent company, and its valuation of $95 per share is a confirmation of the company’s success continuing. 

Activision Blizzard’s Financials

Activision Blizzard’s balance sheet is extremely healthy, with very little debt. It has $10.6 billion of cash and short-term assets and total assets of ~$25.1 billion. Its total liabilities are only $7.46 billion with only $3.6 billion of long-term debt. 

Over the past five years, ATVI’s operating expenses have trended sideways. This is a positive sign, as the company is increasing its revenues while keeping its operating expenses consistent. ATVI’s solid financials, combined with the potential Microsoft Acquisition, present great upside potential. 

Valuation

When valuing Activision’s intrinsic value, investors must consider multiple factors. The first is its current free cash flows and future prospective cash flows. Activision Blizzard also has a strong balance sheet with plenty of cash and long-term assets, and relatively little debt. Cash flows have continued to grow and show continued strength as we head deeper into 2022.

With the valuation from the Microsoft deal combined with the continued strength of Activision’s fundamentals, I have increased my price target from $93.63 to $95.00.

Risks

Activision stock has several risks. First, the video game market is growing slower than other tech industries. With an expected growth rate of 8.17% annually, the video game industry falls short of the social media and financial technology industries.

Although the industry is growing slower, I believe industry market growth is not an indication of success and will not hinder Activision’s ability to deliver results. Examples of company success in a dwindling market are Philip Morris International (PM) and Altria Group (MO) in the Tobacco industry. 

Additionally, due to toxic culture claims, the company may experience difficulty employing quality talent, causing concern about the viability of the Microsoft deal. These issues will likely be short-lived and will not stop Microsoft from acquiring, as it has a history of fixing company culture. 

Wall Street’s Take

Turning to Wall Street, Activision has a Moderate Buy consensus rating, based on 11 Buys, 12 Holds, and no Sell ratings assigned in the last three months. At $96.00, the average Activision Blizzard price target implies 20.9% upside potential.

Final Thoughts

There is some noise surrounding Activision with the Microsoft acquisition and workplace misconduct allegations, but investors can rest assured Activision is a fundamentally sound company with excellent financials.

With the mobile and console gaming market growing, Activision should continue to dominate, as it has in the past. Activision Blizzard’s strong financial position combined with Microsoft’s leadership team provides a bright future outlook, moving through the rest of the year.

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