Ubisoft (UBSFY -0.89%) is a France-based video game publisher that's responsible for hit gaming series like Assassin's Creed, Ghost Recon, Far Cry, and Rainbow Six. Facing a weakening of some of its core franchises, release delays, and challenging comparisons to periods when pandemic-related social distancing and shelter-in-place conditions helped power surging engagement, the company and its stock have admittedly been posting disappointing performance as of late. After big pullbacks, Ubisoft stock looks quite cheap at current prices as it has the resources to bounce back and deliver big wins over the long term.
But there's another reason why I'm loading up on the stock. I almost never invest in a company with the expectation that it will be acquired, but the potential for Ubisoft to be bought out has been a significant factor in my decision to buy more shares lately. Here's why.
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Lately, consolidation is the name of the game
Consolidation has been a trend in the tech sector and the market at large over the past decade and it has ramped up in the past 15 months or so. Take a look at the chart below to see the merger and acquisition (M&A) trends:
M&A activity trended higher from 2010 to 2020, and it then skyrocketed in 2021. Last year could also be viewed as the starting point of the latest acquisition surge in the gaming industry, with Electronic Arts acquiring Glu Mobile at a 36% premium from its pre-deal stock price and an enterprise value of $2.1 billion. Take-Two Interactive and Microsoft have followed up with massive gaming business acquisitions early in 2022, and the big M&A trend in the industry is worth keeping in mind when valuing Ubisoft.
Whether for investors or acquisition suitors, Ubisoft looks cheap
Across the first three reported quarters of Ubisoft's last fiscal year (which ended March 31), the company's net bookings fell 16.6% and bookings through typically high-margin digital channels fell 12.6%. Factor in delays for some long-in-development games and waning investor confidence in the company's product pipeline, and it's not hard to see why the stock is down roughly 45.5% over the last year. On the other hand, I think shares look like a great buy at current prices.
After falling roughly 64.5% from the lifetime high that it hit in 2018, Ubisoft now has a market capitalization of just $5.3 billion and trades at just 10.6 times the midpoint of the company's adjusted operating income target for its recently completed fiscal year.
UBSFY data by YCharts
The company still has an impressive collection of gaming franchises and development and marketing resources, and its current valuation level could make it too attractive as an acquisition for a larger player to pass up.
Microsoft's $68.7 billion buyout of Activision Blizzard represented a roughly 45% upside from the publisher's closing price on the previous market day. Meanwhile, Take-Two Interactive's acquisition of Zynga represented a 64% premium compared to its closing price on the day prior to the buyout being announced. It's worth noting that Ubisoft's stock has actually fallen 18% since Microsoft's acquisition of Activision Blizzard was announced, and recent gaming company acquisition prices bolster the case that Ubisoft should be trading at higher multiples.
With Microsoft snatching up Activision Blizzard in order to augment its games-as-a-service and metaverse initiatives, it wouldn't be surprising to see its console gaming rival Sony make a play for Ubisoft in order to fortify its own competitive position. However, it's also well within the realm of possibility that Microsoft itself could attempt to acquire the French publisher, and other gaming industry players including Take-Two Interactive, Electronic Arts, Tencent, and Nintendo also stand as potential suitors.
Even if Ubisoft isn't acquired, I think it can go on to deliver strong returns for investors. Interactive entertainment is still poised for growth over the long term, and a single hit new series can radically change the narrative surrounding a company in the hit-driven gaming industry. Shares look like a steal at current prices, and the substantial chance that Ubisoft will be bought out at a premium creates even more reason to buy the stock now.
