Eager investors might assume that Microsoft (NASDAQ:MSFT) will take over Activision Blizzard (NASDAQ:ATVI), but there’s an antitrust probe that hasn’t been resolved yet. I am neutral on ATVI stock because it’s not really a bargain at the moment and because Activision Blizzard might have to spin off some of its core assets in order to appease regulators.
Headquartered in California, Activision Blizzard publishes popular video games. The company’s most popular gaming titles are Call of Duty, World of Warcraft, Diablo, Overwatch, and Candy Crush.
Think about it: where would Activision Blizzard be today without those famous game titles? The company just wouldn’t be the same, and it would be a shame if Activision Blizzard had to divest some of its most iconic game titles. Yet, this might actually occur sometime in 2023, and some of the company’s shareholders probably wouldn’t be pleased with that outcome.
Don’t Count on Activision Blizzard for Strong Value or Dividends
Before we get to the main concern about Activision Blizzard, let’s delve into the basics of ATVI stock. Even if the stock is down, this doesn’t necessarily mean it’s a bargain. Plus, Activision Blizzard stock isn’t an ideal holding for income-focused investors seeking a strong dividend yield.
ATVI’s valuation doesn’t look cheap because its trailing 12-month non-GAAP P/E ratio of 22.5x is significantly higher than the sector median P/E of 14.9x. Also, on a trailing 12-month basis, Activision Blizzard’s P/S (price-to-sales) ratio of 7.96x is much higher than the sector median P/S of 1.38x, while the company’s P/B (price-to-book) ratio of 3.12x is far above the sector median P/B ratio of 1.9x.
In other words, according to several commonly cited valuation metrics, ATVI stock isn’t a screaming bargain or even a pretty good deal right now. What about income-focused investors, though? Frankly, they won’t get much yield out of Activision Blizzard. The company’s 0.62% annual dividend yield is better than nothing, but it’s certainly not anything to write home about.
As we’ll see in a moment, Activision Blizzard has strong support among the analyst community. That’s important, and investors should take note of Activision Blizzard’s Buy ratings. Still, there’s a potential problem that prospective ATVI shareholders need to think about: At some point, maybe even this year, Activision Blizzard might end up losing some of its best-known gaming titles.
U.K. Regulators Poured Cold Water on Microsoft-Activision Blizzard Deal
Some folks might not care about whether ATVI stock is a bargain or not and may not be concerned about collecting generous dividend payouts. To be honest, many traders are solely focused on the prospect of Microsoft possibly buying out Activision Blizzard. However, this event isn’t a foregone conclusion, as regulators in the U.K. are putting up roadblocks.
Microsoft has reportedly proposed to buy out Activision Blizzard for $75 billion. That event, if it happens, would likely give ATVI stock a sizable short-term boost. However, the U.K.’s antitrust regulator, known as the Competition and Markets Authority, expressed concerns that a Microsoft-Activision Blizzard merger could weaken competition in the cloud and console gaming markets.
Inhibiting competition, according to the regulators, “could harm U.K. gamers who cannot afford expensive consoles.”
So, don’t count on a merger of Microsoft and Activision Blizzard happening in the very near future. This doesn’t mean the deal is completely off the table, though. The Competition and Markets Authority actually identified some “structural” solutions that might make it possible for the proposed buyout to take place.
These solutions aren’t ideal, however. The Competition and Markets Authority considered that Activision Blizzard could divest “the business associated with” Call of Duty, or could divest “the Activision segment of the company” or “the Activision segment and the Blizzard segment … which would include the business associated with” Call of Duty and World of Warcraft, “among other titles.”
There’s really nothing palatable about any of those proposed scenarios. Call of Duty, World of Warcraft, and “other titles” are undoubtedly what made Activision Blizzard so attractive to Microsoft in the first place.
Activision Blizzard would be a shell of a company after implementing the Competition and Markets Authority’s proposed solutions. So, prospective investors should wait and see how these developments in the U.K. play out over the coming months.
Is ATVI Stock a Buy, According to Analysts?
Turning to Wall Street, ATVI stock is a Strong Buy, based on 14 Buys and two Hold ratings. The average Activision Blizzard price target is $91.87, implying 19.65% upside potential.
Conclusion: Should You Consider ATVI Stock?
ATVI stock has strong support among analysts, so that’s bullish. On the other hand, Activision Blizzard doesn’t pay much of a dividend, and the company’s shares aren’t bargain-priced at the moment.
Besides, anyone counting on a near-term deal between Microsoft and Activision Blizzard is likely to be disappointed. The best strategy, then, is to sit back and play Call of Duty or World of Warcraft or find some other way to distract yourself from the temptation to invest in ATVI stock now.
