Microsoft Stock: The Ins And Outs Of The Activision Blizzard Acquisition – Seeking Alpha
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Very late in 2019, I authored an article on Microsoft (NASDAQ:MSFT) that opened with the following two bullets:
Here we are, roughly two years later, and the investment community is abuzz regarding Microsoft’s initiatives in the metaverse and gaming. The deal for Activision Blizzard (NASDAQ:ATVI) was billed by Microsoft in its press release as serving as “building blocks for the metaverse.” It is the largest acquisition in the company’s history, and it should drive growth in the company’s mobile, desktop, console, and cloud gaming businesses.
However, the investment in Activision, which follows on the heels of the firm’s move to acquire Xandr from AT&T and Nuance Communications (NASDAQ:NUAN), has potential pitfalls.
Microsoft’s most recent quarter provides ample evidence the company still has a lengthy growth runway, but the question that must be answered is whether that growth is already baked into the current valuation.
Dissecting MSFT’s Q2 Results
MSFT provided Q2 2022 results last week. The company beat analysts consensus on the top and bottom line. Revenue, up 20% year-over-year, hit $51.7 billion, $856 million above estimates. Adjusted EPS of $2.48 increased 22% year-over-year and beat by $0.17.
Microsoft’s three segments performed as follows: productivity and business processes, constituting 31% of Q2 revenue, recorded 19% growth.
Intelligent cloud, which provides 35% of company revenue, grew at a 26% rate. Azure and other cloud services experienced a mild deceleration, growing revenue by 46% versus 48% in Q1. Management blamed the slowdown on expected variance in large contract signings. The company guides for increased growth in Azure in Q3.
The More Personal Computing segment notched 15% growth, $700 million above the upper end of guidance. That segment generates 34% of the firm’s revenue.
In addition to Azure’s marked growth, LinkedIn, Dynamics 365, and PowerApps all stood out with growth rates of 37%, 45%, and 161%, respectively.
Management forecasts revenue growth of 16% to 18% year-over-year in the third quarter.
The company returned $10.9 billion in stock repurchases and dividend payments in Q2, an increase of 9% from the comparable quarter.
The Impact Of The Activision Blizzard Acquisition
Last year, Microsoft’s acquisition of ZeniMax Media added top gaming titles including Doom, Fallout, Wolfenstein, and The Elder Scrolls to its gaming portfolio. The ZeniMax deal also increased the number of video game studios in Microsoft’s stable from 15 to 23.
Two weeks ago, Microsoft unveiled a deal to acquire a second major game developer, Activision Blizzard in an all cash transaction. At $68.7 billion, ATVI is priced at nearly eight times next year’s sales, and at $95 per share, the transaction represents a 43% premium to its share price on January 14. The deal is scheduled to close in FY23, which begins in July.
ATVI comes with a plethora of problems: the company is embroiled in sexual harassment and discrimination claims. In turn, those problems led to major management changes, a large-scale employee walkout, and a class-action lawsuit from investors.
This was followed by the revelation during Q3 earnings that two sequels coveted by the gaming community, Overwatch 2 and Diablo 4, would be delayed. Those titles were expected to reach gamers in 2022, but now the company expects no “material contribution” from those games this year. It has also been reported that the troubles the company is facing led to the departure of key talent.
On the positive side, the acquisition will be immediately accretive to …….