Just last week, Microsoft’s (MSFT) $68.7 billion purchase of major video game developer Activision Blizzard (ATVI) rocked the video game industry.
«This represents Microsoft’s largest acquisition ever and the largest M&A deal (Dell/EMC $67 billion) in tech history,» Wedbush analyst Dan Ives wrote of the buy. «Microsoft buying Activision is an aggressive consumer acquisition that includes core franchises such as Call of Duty, Warcraft, and Candy Crush among many others now integrated into the Redmond ecosystem and streaming endeavors.»
Microsoft is clearly showing grand ambitions in this direction, catapulting itself into the conversation among top video game producers in the world with its strident moves toward shoring up Game Pass.
«The Activision deal is certainly a harbinger of more consolidation to come in the gaming space and we’ll continue to see larger companies vertically and horizontally acquire more assets to not only bump revenue but also to compete to win web2 gaming and set themselves up for web3 gaming by owning more assets heading into the metaverse,» Jeff Sue, Americas General Manager for mobile ad platform Mintegral told Real Money. «With the acquisition, Microsoft has essentially leapfrogged into third place in global gaming revenue, behind only Tencent (TCEHY) and Sony (SNE) .»
As the deal already builds upon a multi-billion dollar deal for «Doom» and «Fallout» creator Bethesda Softworks, the Redmond, Washington-based software giant is making no bones about its bullishness on the space.
Beyond these firms already placing focus on gaming like Tencent, Sony, and Microsoft, the race for streaming that often focuses on the video-streaming services of Netflix (NFLX) , Amazon (AMZN) , Alphabet (GOOGL) , and Disney (DIS) is clearly moving to encompass the video game space that so many young consumers remain enthralled with.
«The challenges presented by subscription, streaming, and the metaverse should result in additional M&A in the space,» Ives’ colleague Michael Pachter explained in a note to clients. «As always, content will be a key differentiator.»
If this is the case, many of the aforementioned leaders in movie and television streaming services would be likely acquirers of video game content providers.
In fact, Netflix was not shy about showing its hand in this regard as it continues to build out its own capabilities.
«We have incredible stories, movies that you can only see on Netflix, great TV shows, unscripted, now games coming, then that really — the value equation for any given member or member-to-be in a market is just are they getting good value for what they’re paying,» the firm’s Chief Product Officer Greg Peters said in an earnings call last week.
After a disappointing earnings release that sent the stock spiraling downward on slowing subscription numbers, an eye toward building out the gaming business would be a logical step. Peters also hinted that the development of games after its first major acquisition of a game studio, Night School Studio, in 2021 and its small existing slate of mobile games is a paramount concern.
«It’s still very early days, but generally, what we’re seeing is not surprisingly, we have a growing number of monthly active users, daily active users on these games,» Peters added. «We’re doing this, we’ve been building in parallel what I’m super excited about, which is the sort of internal development capacity, our own game studio.
Netflix is not alone in these aims, either.
Amazon, boosted by its cloud business, game studios, and existing video game-streaming Twitch subsidiary, could likely be acquisitive in this space. Google, which has put emphasis on its Stadia initiative, could be another logical buyer in the space, with much more cash on hand than the notorious cash-burner Netflix. Finally, Meta (FB) could be an acquirer of interest given its exposure to VR via Oculus and its clearly stated interest in the metaverse.
«Amazon and Google are in the mix because they are just giants and have an interest in gaming, so sure they may buy something,» Wedbush analyst Michael Pachter told Real Money in an interview. «I don’t know that either of those end up buying Ubisoft (UBSFF) or Electronic Arts (EA) , but they certainly could.»
There is also the propensity of smaller developers to beef up their offerings, as seen by Take-Two Interactive’s (TTWO) recent purchase of mobile games leader Zynga (ZNGA) for a handsome $12.7 billion price tag.
«We think this is a good deal for Take-Two and view positively the opportunity to increase scale in the rapidly growing mobile games business,» BMO analyst Gerrick Johnson said of the deal. «We see strong potential synergy opportunities, and think market conditions provided Take-Two with an attractive opportunity from a valuation standpoint.»
In this context, firms like Electronic Arts and Take-Two are perhaps overlooked as potential acquirers of smaller developers as they seek to compete with now more powerful peers. Indeed, these firms appear keen to show themselves as more than mere targets for acquisition by trillion-dollar tech firms.
That said, these firms are clearly within the crosshairs for purchase nonetheless. If Microsoft’s appetite for a nearly $70 billion deal is any indication, a hefty price tag is not a problem.
Yet, after a market selloff has hit many of these video game stocks, the value proposition may be more attractive than ever. For example, leader Take-Two has seen its stock tumble more than 10% in 2022, while EA’s market value has eroded by the same margin over the past year.
European game developers like the France-based Ubisoft and Polish developer CD Projekt (OTGLF) have had an even more inauspicious year, with both falling over 40 percent since early 2021 amid uninspiring game releases.
The trend is not much more encouraging among some metaverse-focused stocks, either, namely former high-flyer Roblox Corp. (RBLX) , which has plummeted more than 30% to start 2022. These quick drops in price could potentially be a catalyst, however, as a more reasonable valuation could whet the appetite of a potential suitor.
However, Wedbush analyst Michael Pachter told Real Money that the price for some of these prospects is likely still too rich.
«It is unclear if Roblox is growing and they came out in the middle of kids not going to school due to the pandemic. When kids returned to school, you saw Roblox miss a quarter,» he explained in an interview. «I just don’t see anybody buying them at this price.»
He added that Roblox’s current take rate is unsustainable and will likely need to come down in coming years, asking further questions of profitability moving forward as operating profits remain quite low. He also questioned the productivity of studios like CD Projekt, which has very few hit games to its name.
Pachter cited Ubisoft therefore as the likeliest target, with its valuation looking most appropriate to potential acquirers, with Google, Amazon, or Netflix being the most likely acquirers to match the moves made by Microsoft. He added the caveat that Netflix’s gaming buildout remains almost entirely uncertain at the moment and he is least confident in the company’s ability to contend in the gaming space.
Still, it is also worth noting that regulatory issues may hamper demand for more deals. Even Microsoft’s deal for Activision still has high hurdles ahead of it.
«Sony has a legitimate complaint that if Microsoft were to be buying Activision to pull content off of Playstation, that would be anti-competitive. It would tell consumers that they must buy an Xbox to play some of these popular games,» Pachter noted. «I think that regulators are highly likely to look at the transaction from this perspective.»
He added that regulators will likely scrutinize the deal on market concentration as well. Nonetheless, he voiced his opinion that a consent decree will likely be issued with certain prescriptions for Microsoft to work with Sony and as well as caveats on game pricing, where after it should reach approval.
«I do not expect that the ultimate outcome will be a challenge on market concentration,» Pachter said. «However, the stock market thinks I am wrong, which is why Activision shares are trading closer to where they were prior to the deal.»
That all comes as Microsoft is perhaps the least-scrutinized mega-cap tech company, with Amazon, Facebook, Apple (AAPL) , and Alphabet often finding themselves the targets of outrage by legislators, both in the U.S. and abroad.
Overall, while the appetite for acquisitions appears to be present, there is likely a headache in terms of regulatory review that will be inherent in any move. As such, investors might need to curb expectations on seeing quite the blockbuster-level deals that Activision’s massive price tag might have initially portended.
(MSFT, AMZN, GOOGL, AAPL is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AAPL? Learn more now.)
At the time of publication, Curran was long RBLX.
Many market players have navigated the market extremely well, but it’s not because they foresaw the future.
Now it’s big earnings ahead, including Amazon and Meta.
Here’s why you should be impressed with the uptrend in SEE.
Take a look at the PowerShares QQQ Trust
Thank you, your email to has been sent successfully.
We’re sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.
Email Real Money’s Wall Street Pros for further analysis and insight
Already a Subscriber? Login
© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281
Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.
TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.
FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.
Follow Real Money’s Wall Street Pros to receive real-time investing alerts
Already a Subscriber? Login
