Today we have a moderately speculative idea.: take shares in video game publisher Activision Blizzard (NASDAQ: ATVI), to make money buying a company.
Growth potential and validity: 16,5% behind 17 months excluding dividends; 26,5% behind 2 years excluding dividends; 8% per annum during 8 years including dividends.
Why stocks can go up: The company's shares are currently trading below the price of its expected Microsoft acquisition..
How do we act: we take shares now by 81,34 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
We already had a couple of investments in the company: in the first, we analyzed her business in detail, the second assessed it taking into account the changed circumstances as of 3 Quarter 2021. We won't repeat here., but we focus on the most important points:
- The company develops and publishes video games. She owns the rights to such famous series, как Call of Duty, Diablo, Overwatch, World of Warcraft и Candy Crush.
- The mobile games division of the company is one of the strongest in the industry and shows higher margins compared to its own games for large platforms - it can be considered the core of the business and the most promising asset.
- The company's shares fell sharply in 2021 because of the toxic corporate culture scandal.
Arguments in favor of the company
Buy - do not buy. As I said in the second investment idea, company is going to be bought by Microsoft. ATVI wants to buy for 68.7 billion dollars - or 95 $ per share. Basically, the idea can be considered closed, but we had a happy opportunity to make money on ATVI once again.
Now ATVI shares are worth 81,35 $ - which is significantly lower than the declared purchase price. All because, that market participants are not entirely sure about, that the deal will be closed: they estimate the probability somewhere at the level 60%.
U.S. Antitrust Regulators Get Tougher Under Biden, than under Trump, and can easily block the deal. After all, if the deal is closed, Microsoft will become the third gaming company in the world after Tencent and Sony - and Microsoft may well limit the access of its content to Sony game consoles., what will hinder competition.
Even if US regulators give the green light to the deal, Chinese and European regulators may speak out against - because the businesses of ATVI and Microsoft have a global scope, and if the companies merge, then it may bring problems for the development of competition in other countries and regions.
The existing gap between the market price and Activision Blizzard's possible sale price gives us the opportunity to pick up these shares again and profit from them because, that in the current circumstances there are several options for the further development of events that are favorable for us.
Option one. Probability, that Microsoft will be able to close the deal, I am more optimistic, than the average market: the chances of the company seem to me about 88%. The brainchild of Bill Gates is the heavyweight champion in the ESG world, and at the behest of the American establishment, the company is ready to carry out the most idiotic decrees like buying TikTok. And that means, that the company is in good standing with the powers that be, at least in the USA.
Therefore, it is very likely that, that as a reward for exemplary behavior, US regulators will give the go-ahead to approve the deal. Certainly, it does not guarantee, that Chinese and European regulators will behave in the same way.
Option two. Bidding for ATVI may start. The possibility of the takeover of Activision Blizzard by Microsoft bodes problems for several companies at once. And they may well offer ATVI a higher price - for example, at the level 103 $, who asked for shares back in February 2021. Some companies may challenge Microsoft: if they have the most to lose if the deal closes and are also large enough to, to offer a higher price.
The biggest loser is, of course, Japanese Sony. Microsoft may make ATVI games exclusive to its Xbox console, and this will hit the attractiveness of the Sony PlayStation in the eyes of the players hard.: I myself took the PS4 to a large extent, given the availability of cross-platform games on it.
For Sony, games are the third most profitable business segment., and its operating margin is 12,41% from segment revenue. So it seems like a plausible scenario to me, at which Sony will offer to buy ATVI. It can be objected to, that Sony's financial resources are much more modest, than Microsoft.
But the company will be able to take advantage of connections in the Japanese government - this is one of the key conglomerates in the Japanese economy., and his political influence in this country is great - and get the right amount on credit on acceptable terms. And it can also partially take advantage of the Japanese residence permit - Japan has a very low level of protection for minority investors - and get some of the missing money through the issuance of new shares, that will dilute the value of existing.
Another less obvious loser is Apple.. If the deal is closed, then Microsoft will strengthen its position in the mobile games segment. It doesn't directly hit Apple's business here and now., but Apple is one of the few technology companies, do not have their own significant gaming segment. This could well be corrected by purchasing ATVI. And let Apple have less motivation to do this, than Sony, but Apple's financial resources are incomparably greater.
There may be another buyer, but I see Sony and Apple as the most likely candidates. And from the news of a competing offer, the price of ATVI shares will certainly be closer to the cherished 95 $.
With such news, Microsoft will not abandon its plans and simply offer a higher price for ATVI, than competitors: She buys ATVI at a not very high price and with great benefit for her business.
Independence. If ATVI continues to exist as an independent company, then this can happen not only because of regulatory obstacles. The deal may well be blocked by shareholders from Microsoft: spending money to buy an ATVI, which "could be spent on dividends!"and this is the biggest purchase in the history of the company.
The block can also occur from the ATVI side: the purchase price of the company is less than the historical highs of these shares. However, the prospects for an independent ATVI look good to me. Certainly, it will be worse than selling it at the price indicated by Microsoft. But even here you should not be upset: we will be able to earn on independent ATVI.
Traditionally inexpensive. ATVI is now relatively inexpensive: P / E she has 24, which is much lower, than competitors, — 34 у Take-Two и 51 in EA Games, - and its business itself is generally stable and marginal.
The reason for this fact, that ATVI is trading at a tangible "discount", - exclusively the previously mentioned corporate scandal. But this problem is solvable.: Microsoft or any other external manager will not be able to do anything to correct the situation., what ATVI wouldn't do. Even before the news about a possible sale, ATVI began large-scale purges and may well cope with the consequences of the scandal on its own..
How an independent company ATVI could quadruple its dividend, to please investors, management and employees, - it would be a very logical decision.
promising moment. Finally, the strongest mobile division of the company is a very cool asset, which will continue to influence its business in the most positive way. So as an independent company, ATVI is not the worst investment option.. Truth, it will be a long term investment option.
What can get in the way
Disenchantment. If the sale of the company does not take place, then stocks may fall disproportionately, and you have to be ready for it.
Expected Issues. If ATVI remains independent, then the same problems will be relevant for us, which I outlined in the previous investment idea for the company.
It may turn out like this, that the scandal with corporate culture will not subside and even flare up with renewed vigor. The main danger here is, that the shares will be subject to blockade by the ESG lobby and, may be, even company partners. This risk must be considered.
The management of independent ATVI, instead of coaxing shareholders with payouts, may venture into buying some pointless expensive money-losing startup in a vain attempt to divert investors' attention from the problems in ATVI itself.. And from such a purchase from the ATVI business, “indigestion” can begin, what will affect the quotes in the worst way.
Even companies, whose management doesn't feel cornered, capable of gestures of desperation, detrimental to shareholders: you can remember the history of Zynga and Take-Two. Independent ATVI's management may be even more adventurous..
What's the bottom line?
I’ll make a reservation right away, that this idea is risky. Here there is a risk of becoming a long-term investor in the event of a strong drop in the company's shares in that scenario., where ATVI will remain independent. If you are ready for it, you can take shares now 81,34 $. And then there are three options.:
- wait, when will the shares start to cost 95 $. Think, it may take about 17 Months, because the mills of the regulatory bureaucracy grind slowly: remember the history of Nvidia and Arm. So you need to prepare to hold the shares for the specified period.;
- wait, until someone offers to buy ATVI at a price 103 $ per share and will not buy it with that money. Here, probably, it is worth counting on a period a little longer - about two years;
- if ATVI remains independent, keep shares next 8 years pending, that the success of the mobile unit will play a role, and ATVI management will resolve the situation with the scandal and increase dividends, to the delight of shareholders and employees.
If you are not ready for the third option, then you should not touch these shares: you have already earned enough on ATVI, if you used the previous two ideas.