Shares of enterprise software giant Microsoft (MSFT) has been betting big on its video-gaming business of late, recently doubling down with a deal to scoop up Activision Blizzard (ATVI) in a deal worth almost $69 billion.
Indeed, the acquisition does not come cheap, and it could be one of the most scrutinized deals in quite a while. With regulatory approval of the deal up in the air (ATVI stock is currently ~20% lower than its takeover price of $95), some seem doubtful that the deal will happen. Still, I think Microsoft is wise to at least put the U.S. FTC to the test with such a deal. In any case, I am bullish on MSFT stock.
Deal could Give Microsoft an Edge in Gaming Wars
If an Activision-Microsoft tie-up is given the green light, the floodgates could open up, and the game industry might be consolidated by big tech.
Given the sheer size of the deal, there’s a good chance it will fall through at the hands of regulators. Still, I think the deal will (and probably should) be approved anyway.
Chinese tech behemoth Tencent Holdings (TCEHY) is a force to be reckoned with in the global gaming scene. The U.S. could use a big-gaming firm to stay at the forefront in the fast-growing industry, which could be given a jolt as we transition into the metaverse.
If the Activision Blizzard deal were to go through, Microsoft would be able to better stack up against Tencent. Gamers would likely applaud such a deal, given that more high-quality content would be welcomed to Microsoft’s Xbox Game Pass—a subscription service that’s describable as the Netflix (NFLX) of video games. Combine that with Xbox Cloud Gaming, previously known as Project xCloud, and Microsoft might have the ultimate one-two punch to take the gaming world by storm, bringing triple-A content to casual gamers.
Microsoft: Already the Netflix of Gaming
The Xbox Cloud Gaming service is in beta right now. Early signs show that it could be a smash hit, as the company looks to iron out the service’s wrinkles. Despite the intriguing technology behind Microsoft’s game-streaming platform, content remains king.
In terms of high-quality content, Microsoft could be the answer to Tencent in the gaming world. Of course, the approval of an Activision Blizzard deal would help the firm leap-frog its way to global dominance.
Given an Activision Blizzard deal would likely further enhance the value proposition for Xbox gamers, U.S. regulators have reason to let the ATVI-MSFT deal go through. The gaming industry is consolidating.
Microsoft could Give Tencent a Bigger Run for its Money
Tencent has been wheeling and dealing for many years now, scooping up big stakes in some of the most intriguing video-game studios out there.
With Sony’s recent acquisition of Bungie for $3.6 billion, the race is on at the international level. Plus, now may not be the best time for U.S. regulators to flex their muscles to take a stride out of big tech’s step.
Roughly valued at $95 per share, Microsoft’s all-cash takeover could be a game-changer that brings the company’s gaming ambitions to the next level.
I think the price paid severely undervalues Activision Blizzard and its deep content library. While Activision Blizzard has been in hot water of late over its poor workplace practices, with CEO Bobby Kotick feeling the heat, I do think that a change of scenery and management could allow Microsoft to generate meaningful synergies.
Wall Street’s Take
According to TipRanks’ consensus analyst rating, MSFT stock comes in as a Strong Buy. Out of 28 analyst ratings, there are 28 Buy recommendations.
As for price targets, the average Microsoft price target is $375.30, implying an upside of 22.7%. Analyst price targets range from a low of $320.00 per share to a high of $425.00 per share.
The Bottom Line on Microsoft Stock
Microsoft really took advantage of a dire situation over at Activision Blizzard. If the deal goes through, I’d pin it as a massive win for MSFT and ATVI shareholders. The gaming race is on, and regulators might have enough reasons to stand out of the way this time.
Only time will tell if Microsoft can add yet another powerful weapon to its gaming arsenal. In any case, MSFT stock seems way too cheap at current levels, given its front-row seat to video games and the cloud—two high-growth markets that should keep growth elevated for years to come.
Microsoft stock trades at a premium multiple at north of 32 times trailing earnings. Arguably, it deserves an even richer multiple, given the calibre of business you’re getting. Microsoft is continuing to evolve before our eyes, and its CEO Satya Nadella is the man to thank.
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