Global technology powerhouse Microsoft Corporation (MSFT), worth nearly $2.47 trillion, concluded its $69 billion acquisition of renowned game developer Activision Blizzard, Inc. last week, pulling off history’s most prominent tech deal after two years of regulatory scrutiny and significant resistance from multiple stakeholders in the gaming industry.
The conclusion of this prolonged deal dispels the lingering uncertainty concerning the Microsoft-Activision partnership. However, the key question on everyone's mind is: What follows this grand acquisition?
The Acquisition and Its Potential Impact
MSFT CEO Satya Nadella, who took the helm in 2014, aims to broaden the company’s business beyond its core operating systems and productivity software domains. ATVI, a partner and competitor to MSFT, stands out among large companies for releasing top-rated games with production values reaching the hundreds of millions.
At the peak of the metaverse trend, the announcement of MSFT's acquisition of ATVI in January 2022 signaled the grandest deal in historical records. The strategy behind the acquisition was to bolster MSFT’s presence in gaming and the metaverse and establish itself as the unrivaled leader in cloud gaming.
Yet, its fruition faced hurdles due to antitrust concerns. Regulators globally analyzed whether the acquisition might result in excessive market control for MSFT. Eventually, the deal received official clearance last week following approval from the U.K. regulators, marking it the largest deal in MSFT's 48-year history.
But there is a significant condition accompanying this clearance. For the next 15 years, MSFT has agreed to surrender cloud-streaming rights for all ATVI games outside the European Economic Area (EEA), including 27 European Union member states along with Iceland, Liechtenstein, and Norway.
Ubisoft, a French game publisher, secured exclusive global streaming rights outside the EEA, while within the EEA, it will share these rights with other competitors, including MSFT/ATVI. This marked a pivotal concession from MSFT, which contributed to aligning with UK regulatory standards.
ATVI enjoyed the title of the largest game publisher in North America, hosting various popular games under its belt, ranging from "Call of Duty" to "Diablo" and "World of Warcraft," amongst others.
MSFT’s acquisition will expand the tech giant's ownership to include all developers under the acquired banner, ranging from Activision Publishing to King, the creator of "Candy Crush." This strategic addition is expected to enhance MSFT's foothold in the booming mobile gaming industry through synergies with its franchises, such as "Halo" and "Forza," which could generate significant revenue in the coming years.
With a vast list of ATVI's titles under MSFT's umbrella and its robust platforms like Xbox, Game Pass, and Xbox Live, the company is poised to become an even greater force in the gaming sphere. With this, few competitors could rival MSFT's arsenal, enriched further by access to ATVI’s renowned studios, including Treyarch and Infinity Ward.
Xbox head Phil Spencer has consistently championed a transformation of Xbox from a console-centric brand to a content-first platform, focusing on player engagement rather than console sales. The self-disruption philosophy is expected to be further cemented post-acquisition, fortifying the strategy to build a prolific portfolio of games and IPs.
This monumental acquisition could propel MSFT to become the third biggest gaming giant globally in revenue, trailing behind Tencent and Sony.
MSFT's leap into the mobile gaming industry could experience a considerable boost from this deal. As of June 30, 2023, ATVI reported a monthly active user base of 356 million. In the second quarter of 2023, the company posted consolidated revenue of $2.21 billion, with an impressive $943 million derived from the mobile gaming segment. ATVI's prominence in mobile gaming will inevitably contribute to MSFT's anticipated growth in this segment.
Projecting ahead, estimated future cash flows pertaining to this deal, when adjusted to their present value, may surpass the acquisition cost of $69 billion, thereby positioning this alliance as an advantageous venture for MSFT.
Moreover, MSFT can potentially accelerate the growth of the acquired assets using its large-scale resources, including AI-driven initiatives – an added advantage. The acquisition is also fiscally beneficial for MSFT, which secured a high-margin business of Activision at 23.55x forward P/E compared to its 30.15x forward P/E.
Moreover, tech behemoth MSFT is on a promising growth trajectory as it branches out across several tech sectors and could present significant potential to investors over the long term.
Institutional investors have recently made changes to their MSFT stock holdings. Institutions hold roughly 70.6% of MSFT shares. Of the 4,862 institutional holders, 2,038 have increased their positions in the stock. Moreover, 197 institutions have taken new positions in the stock with 19,638,556 shares, reflecting signs of bullishness.
MSFT's workspace communication tool, Teams, has seen substantial growth and is expected to contribute significantly on the backs of expanding customer base and features. This has benefited MSFT in winning shares in the enterprise communication industry. Teams' user growth is attributable to the increasing shift towards hybrid and flexible working models. This trend could boost the fiscal first-quarter financial report to be released on October 24.
Furthermore, MSFT broadened the availability of its Microsoft 365 Copilot feature to a larger customer base during this quarter – which is also anticipated to boost revenue growth. The high adoption rates for Dynamics 365 software are additional factors projected to spur top-line growth in the to-be-reported quarter.
For the fiscal first quarter ending September 2023, MSFT’s revenue and EPS are expected to increase 8.8% and 12.7% year-over-year to $54.53 billion and $2.65, respectively.
Moreover, Wall Street analysts expect the stock to reach $398.24 in the next 12 months, indicating a potential upside of 19.9%. The price targets range from a low of $298.10 to a high of $440.
The global video game market continues to be dynamic and transformative and is expected to reach $583.69 billion, growing at a CAGR of 13.4% by 2030. With the full integration of the two companies, a significant change in the video game industry could be witnessed. The deal will boost MSFT's gaming revenues and offer benefits to consumers.
Prudent investment decisions necessitate strong consideration of a stock's valuation. MSFT’s forward non-GAAP P/E of 30.15x is 36.4% higher than the industry average of 22.10x, while its forward Price/Sales multiple of 10.46 is 310.1% higher than the industry average of 2.55.
Despite trading at a premium over its industry peers, MSFT's robust financial standing, well-strategized acquisitions, compelling growth trajectory, and optimistic analyst projections position it as an attractive investment opportunity. The stock’s upside potential justifies the premium it demands.
Further bolstering this standpoint is MSFT’s impressive history of shareholder returns. In the fourth quarter of fiscal 2023, it paid dividends and repurchased shares worth $9.7 billion. The company has maintained a steady dividend payment trend for 18 years.
Furthermore, the successful execution of a $60 billion share buyback initiated in 2022, typically renewed by MSFT every few years, is projected to extend through 2025. This highlights MSFT’s another pivotal step in continuing to augment shareholder value.