For the last few months, Activision Blizzard (ATVI, Financial) investors have mainly been talking about one thing: whether or not the Microsoft (MSFT, Financial) deal will go through as planned.
In January, Microsoft unveiled its intention to purchase Activision Blizzard for a whopping $69 billion. The transaction is expected to close by June 2023. However, the deal is under the scanner. News is circulating that the U.S. Federal Trade Commission will likely file an antitrust lawsuit against the merger. And in the hyper-sensitive news atmosphere we have now, it comes as no surprise shares fell in response.
In addition, the European Commission has started an in-depth investigation citing concerns about Microsoft's possibility of controlling a big chunk of the market. The announcement of whether the EU will give the green signal or block the deal will come next year.
The UK Competition and Market Authority also launched a full-scale investigation based on the concern that Microsoft would withhold access to Activision's best-selling games, harming its consumer base.
Sony (SONY, Financial) has also criticized the acquisition and expressed the same concerns as the authorities. The console giant believes it is most likely that the merger will cause a big competition problem and should thus be blocked. Sony says that if Microsoft were to acquire Activision, all content prices would increase. This would force many smaller game developers out and make it impossible for them to produce quality games. Such events would only be detrimental to the gaming industry overall.
In response, Microsoft has released statements that it is ready to cooperate with authorities and competitors to satisfy any concerns about the deal. If the deal falls through for any reason, Activision will receive a $3 billion breakup fee paid by Microsoft.
However, in the middle of all the hoopla surrounding Microsoft's bid for Activision, investors need not forget the company is still one of the best companies in its industry. There are very few players that boast a product lineup and consistent performance like Activision. In my opinion, the stock is a great deal even if the Microsoft deal falls through.
Healthy earnings and an attractive portfolio
In the third quarter, Activision Blizzard reported that its net bookings were $1.83 billion, up from analysts' estimates of $1.7 billion. Meanwhile, the in-game net bookings were $1.36 billion, up from the $1.20 billion reported in the same period last year.
The mobile net bookings grew more than 20% year over year to approximately $1 billion. The growth has been attributed to the success of various content initiatives for the main intellectual properties.
The non-GAAP earnings per diluted share in the third quarter was $0.68. The 23.6% decline versus the year-ago period is indicative of the tough conditions of the gaming industry; the third quarter saw a decline of 7% year on year to $10.64 billion in overall content spending in the industry, while consumer spending for mobile gaming fell 9%. Overall, though, the company delivered beats on both the top and bottom lines.
The company exited the quarter with net cash of around $7.3 billion. While the company made no forecast in light of the possible acquisition, it mentioned that it expected a 20% year-on-year growth for both net bookings and total segment operating income.
Activision's games make record-breaking waves in the gaming industry
Activision Blizzard is a powerhouse of video gaming and entertainment. It is one of the most recognizable names in the industry, boasting an impressive portfolio of blockbuster hit games such as Call of Duty and World of Warcraft. These titles have kept consumers returning for more since they were released in the early 2000s, setting record after record each time a sequel was released.
Furthermore, this company has been working diligently to diversify its portfolio by acquiring new development studios and launching mobile titles to meet the needs of modern gamers.
Launched in October, Overwatch 2 had 35 million players in its first month, and the company emphasized that its strong player investment will play a key role in the fourth quarter results.
As for the company's gold mine, Call of Duty's franchise saw a new release called Call of Duty: Modern Warfare II. The new installment is one of the most successful games, with more than $1 billion in sales. Call of Duty: Modern Warfare II broke not only sales records but also hours played; in the first 10 days, the number of hours played was 40% more than the previous record in the franchise.
The Candy Crush franchise is still boosting the company's profits even 10 years after its launch. With more than 200 million monthly active users, Candy Crush is one of the top games in the U.S. and is largely responsible for King's 8% increase in in-game net bookings.
With a huge user base across all platforms and properties like Candy Crush Saga doing gangbusters on mobile devices, ATVI is deservedly seen as one of the gaming industry's biggest and most successful stocks. This gold mine will likely keep providing investors with windfall profits for years to come.
Some notable headwinds exist
Activision Blizzard has a lot going for it. However, some concerns should be addressed to give a complete picture of the stock.
In the latest earnings report, the company reported that its monthly active users fell by 5.6%. This number needs to be put into context. During the early months of the pandemic, people had more time for themselves, and many used it to play video games. However, now that people have less free time again due to the return to offices and more time spent in cars going to social gatherings, driving kids to school, etc., they have less time to play games. Competitors like Roblox (RBLX, Financial) have suffered a massive dip in active users as well. So, this is an industry-wide trend.
In addition, the company is facing a rough time as it could not renew its deal with NetEase (NTES, Financial) in China. The expiration of the partnership in January 2023 could mean the end of the distribution of Activision's content in the country. If the company cannot find a new partner in the country, it will impact the business only slightly, as just 3% of its consolidated net revenues in 2021 came from such licensing agreements.
Takeaway
Few companies in the gaming industry have been as successful and popular with gamers as Activision Blizzard. Already dominating the market with a portfolio of iconic games such as Call of Duty, Overwatch and World of Warcraft, the company continues to experience success despite competition from other gaming studios.
Thanks to robust business strategies and prudent leadership, Activision Blizzard is well-positioned in almost all aspects of the industry and is likely to meet short-term goals set by investors. For these reasons and more, it could prove lucrative for investors regardless of the Microsoft deal.
The stock is also trading in line with its fair value based on the GF Value chart. As Warren Buffett (Trades, Portfolio) once said, great companies trading at fair prices are a better value than fair companies trading at great prices.
