Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft stock is down more than 21% for the year as the COVID-19 pandemic continues to have a lingering impact on supply chains and the resurgence slows consumer demand. These problems have similarly affected many technology stocks. Nevertheless, Microsoft investors have reason to be particularly optimistic about the company.
In January, the tech giant began the process of acquiring video game company Activision Blizzard for a record $68.7 billion. The deal is under scrutiny from regulators around the world, but encouraging words from Microsoft gaming CEO Phil Spencer suggest that the purchase will go through. If so, Microsoft will be one of the top three gaming companies in the world, which could mean that its stock is absolutely a bargain at its current price.
Microsoft gaming CEO Phil Spencer told Bloomberg in an Aug. 24 interview the latest news about the Activision purchase, saying: "I'm pleased with the progress we've made" with regulators. He added: "[T]he discussions we're having seem to be positive." Although Spencer did not give more specifics on the status of the deal, the colossal size of the deal has put it under an intense regulatory process that requires Microsoft to get antitrust approval before it can be completed.
The nearly $70 billion acquisition of Activision Blizzard is the first attempt at a deal of this magnitude in the industry and has prompted intense scrutiny. Microsoft estimates that the purchase will last until mid-2023, but the company is optimistic that it will go through. The first regulatory approvals for the deal came from Saudi Arabia on Aug. 22, suggesting that Microsoft may soon receive approvals from other regions -- particularly the U.S., the U.K., and Europe. Each of these regions has the right to either block the purchase or add its own conditions.
While the process may seem complicated, reliable investors like Warren Buffett have confidence in the Microsoft-Activision Blizzard deal. In April, Buffett announced that his holding company, Berkshire Hathaway, owned 9.5 percent of the company, believing that the purchase would be successful. Then, in August, Berkshire increased its stake in Activision from 64.3 million to 68.4 million for $5.3 billion.
The gaming industry is huge, with thousands of new games released each year from almost as many developers. Microsoft's purchase of Activision Blizzard would increase its market share, but not enough to overtake rivals like Tencent and Sony, making the deal likely.
In Q4 of 2021, Microsoft ranked fourth among the world's largest gaming companies by revenue at $3.9 billion, behind Tencent at $7.9 billion, Sony at $4.3 billion, and Apple at $4.4 billion. A deal with Activision is expected to move Microsoft into third place among the largest gaming companies.
Although Activision Blizzard is home to an extensive library of popular games, one franchise has largely boosted its price tag: Call of Duty, the second best-selling video game series in history. By 2021, multiplayer game sales totaled 400 million units, second only to Tetris with 496 million. In 2021, Activision president Daniel Alegre said during an earnings report that since 2003, the Call of Duty franchise has brought the company about $27 billion. If you average the total over the years, Microsoft has the ability to make an extra $1.4 billion a year from Call of Duty, not including the many other popular franchises in Activision's catalog of games.
What's more, Activision's game library has the potential to significantly boost the already successful Xbox Game Pass game subscription service - essentially Netflix for games. The service was launched in 2017 and has since had 25 million users. Although Microsoft did not provide an update on Game Pass subscribers in its latest earnings report, outside projections suggest that the segment could generate $4 billion in revenue by the end of the calendar year 2022. A popular game like Call of Duty could drive further growth for the service, even if Microsoft sticks to its plan to keep it available on all consoles.
Microsoft is launching its own games on release day on Xbox Game Pass, a feature that has attracted millions of users and made Xbox consoles some of the most expensive gaming machines on the market.
As Microsoft adds Activision games to its already extensive library, more gamers are likely to switch to Xbox for broad access. Sony, meanwhile, recently announced a price hike for the PlayStation 5 in many regions, causing discontent from gamers around the world and contributing to the latest drop in Sony's stock price. On the same day that Sony announced the Playstation price hike, Microsoft announced that Xbox Series X and S prices would remain the same.
Although Microsoft's stock price has fallen since January, the company increased revenue by 18% across all segments in the fiscal year 2022, suggesting that investors are misjudging the technology company's prospects. Microsoft's price-to-earnings (P/E) ratio is down more than 26% over the past year and appears to be trending downward, indicating that the company is worth buying at the current price. Tech stocks may have lost ground since the height of the pandemic, but with their current valuation, thriving cloud services business, and growing gaming aspirations, Microsoft looks like a winner that trades at a discount.
As long as price is below the 268.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: shortposition
- Entry point: 262.87
- Take Profit 1: 255.00
- Take Profit 2: 250.00
Alternative scenario:
If the level of 268.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: longposition
- Entry point: 268.00
- Take Profit 1: 275.00
- Take Profit 2: 282.00
