Throughout 2023, mergers and acquisitions will be a frequent topic of discussion. In recent months, most M&A news has centered around the merger of grocery retailers Kroger
KR
and Albertsons
ACI
. Yet Microsoft’s
MSFT
planned acquisition of Activision Blizzard
ATVI
will be very significant in the wider tech space.
With or without the merger, Activision Blizzard is starting to look like a sound investment for 2023 with earnings estimate revisions on the rise.
Microsoft Acquisition
Microsoft’s planned acquisition of Activision Blizzard, which is a leading developer and publisher of console, online, and mobile games is expected to be completed in June of 2023. Activision Blizzard’s newly released games include “Overwatch 2” and the latest addition to its famous “World of Warcraft” franchise with a premium series for its renowned “Call of Duty” video games set to be released later in the year. .
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However, the Federal Trade Commission has filed an antitrust lawsuit to block Microsoft’s Activision Blizzard deal. The idea of Microsoft and Activision Blizzard teaming up has been frowned upon by Microsoft competitors such as Sony
SONY
because popular video game brands like “Call of Duty” would be under Microsoft’s control.
Still, Microsoft has stated it would not be the global leader in gaming and vows to provide the popular “Call of Duty” games to other platforms including Sony’s PlayStation and not just Microsoft’s Xbox gaming systems.
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Of course, Microsoft is fighting the lawsuit. Microsoft hopes acquiring Activision Blizzard will help accelerate the growth of its gaming business and provide building blocks for the metaverse.
The proposed acquisition is for $68.7 billion and will add to Microsoft’s top and bottom lines down the road. As for Activision Blizzard shareholders, they will have the option to convert shares and will be entitled to receive $95 in cash for every share of ATVI, which is 24% above the current stock price of $76 per share.
ATVI Growth & Outlook
As previously mentioned, Activision Blizzard stock is starting to look attractive even if the company is not acquired by Microsoft.
Fiscal 2022 earnings are now expected to drop -18% but rebound and jump 29% in FY23 at $3.91 per share. Even better, earnings estimate revisions have started to go up for both FY22 and FY23 over the last 60 days.
On the top line, sales are forecasted to be down -2% in 2022 but rise 17% in FY23 to $9.59 billion. Fiscal 2023 would represent 48% growth from pre-pandemic levels with 2019 sales at $6.48 billion.
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Performance & Valuation
Over the last year, Activision Blizzard stock is up an impressive +14% to outperform the S&P 500’s -21%. This has also outperformed Microsoft’s -28% over the last year and the Toy-Games-Hobbies Market’s -9%. The spike in ATVI shares last year was mostly attributed to the acquisition news.
Looking at the last decade, ATVI stock is now up +587% to beat the benchmark and its Zack Subindustry’s +298%, but trail MSFT’s +788%.
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At current levels, Activision Blizzard has a forward P/E of 29.3X. This is above its industry average of 16.3X but Activision Blizzard is a proven leader in its space. Activision Blizzard stock also trades nicely below its decade high of 34X and not far above the median of 23.9X, with the rising earnings estimates also supporting its P/E valuation.
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Bottom Line
Along with the upside to the $95 acquisition price, ATVI stock also sports a Zacks Rank #2 (Buy) in correlation with rising earnings estimate revisions for both FY22 and FY23. This combined with ATVI’s reasonable valuation at current levels are reasons to believe the company will be okay with or without the Microsoft deal.
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