Microsoft's (MSFT 1.82%) stock is down over 21% year to date as the COVID-19 pandemic continues to have lingering effects on supply chains and reopenings slow consumer demand. The issues have similarly affected multiple tech stocks. And yet, Microsoft investors have reason to be particularly bullish about the company.
In January, the tech giant began acquiring video game company Activision Blizzard (ATVI) for a record $68.7 billion. The deal is undergoing scrutiny from regulators worldwide, but encouraging words from Microsoft's CEO of gaming, Phil Spencer, suggest the purchase will go through. If that's the case, Microsoft stands to become one of the world's top three largest gaming companies, which could mean its stock is an absolute bargain at its current price.
A historic acquisition
On Aug. 24, Microsoft's gaming CEO, Phil Spencer, gave an update on the purchase of Activision in an interview with Bloomberg, saying, "I feel good about the progress that we've been making" with regulators. He added, "[T]he discussions we've been having seem positive." While Spencer didn't give more specifics on the deal's status, the transaction's colossal size has put it under an intense regulation process where Microsoft must obtain antitrust approval before it completes.
The almost $70 billion acquisition of Activision Blizzard is the first time a deal of this size has been attempted in the industry, inviting fierce scrutiny. Microsoft estimates the purchase will take up until the middle of 2023, but the company is optimistic it will go through. The first regulators to approve the deal came from Saudi Arabia on Aug. 22, suggesting Microsoft might hear from other regions -- particularly the U.S., the U.K., and Europe -- soon. These regions each have the power to either block the purchase or add stipulations.
While the process may seem arduous, trusted investors such as Warren Buffett have put their faith in the Microsoft-Activision Blizzard deal. In April, Buffett said his holdings company, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), owned 9.5% of the company's shares, betting the purchase would succeed. Then, in August, Berkshire increased its Activision shares from 64.3 million to 68.4 million, worth $5.3 billion.
The gaming industry is vast, with thousands of new titles released annually from an almost equal amount of developers. Microsoft's purchase of Activision Blizzard will grow its market share, but not enough to overtake competitors such as Tencent (TCEHY 2.19%) and Sony (SONY -0.13%), making the deal likely to succeed.
Why should Microsoft buy Activision Blizzard?
In the fourth quarter of 2021, Microsoft ranked fourth among the world's biggest gaming companies by revenue with $3.9 billion, coming behind Tencent's $7.9 billion, Sony's $4.3 billion, and Apple's $4.4 billion. The Activision deal is anticipated to elevate Microsoft to the third-largest gaming company.
While Activision Blizzard is home to an extensive library of popular games, one franchise has mainly bolstered its price tag: Call of Duty, the second best-selling video game series in history. The multiplayer games had sold 400 million units by 2021, only second to Tetris with 496 million. In 2021, Activision president Daniel Alegre said in an earnings call that the Call of Duty franchise had generated about $27 billion since 2003. Averaging out the total by year, Microsoft has the potential to earn an extra $1.4 billion a year from Call of Duty before considering multiple other popular franchises in Activision's game catalog.
Moreover, Activision's game library has the potential to substantially boost Microsoft's already successful game subscription service, Xbox Game Pass -- essentially, the Netflix for games. The service launched in 2017 and has since grown to 25 million members. While Microsoft did not provide updates on Game Pass subscription numbers in its most recent earnings report, outside projections estimate that the segment could generate $4 billion in revenue by the end of the 2022 calendar year. A title as popular as Call of Duty could further boost the service, even if Microsoft sticks to its plan of keeping it available across all consoles.
Microsoft launches its in-house games on release day on Xbox Game Pass, a feature that has attracted millions of members and made Xbox consoles one of the best-valued gaming machines on the market.
As Microsoft adds Activision titles to its already-extensive library, more gamers are likely to flock to Xbox for expansive access and solid value. Sony, meanwhile, recently announced that it would increase the price of the PlayStation 5 in multiple regions, drawing ire from gamers worldwide and contributing to Sony's latest slide in share price. The same day that Sony announced its Playstation price hike, Microsoft shared that the price of its Xbox Series X and S would remain the same.
Even today, Microsoft looks like a bargain
MSFT PE Ratio data by YCharts
While Microsoft's share price has tumbled since January, the company grew revenue by 18% across all segments in fiscal year 2022, suggesting that investors are misjudging the tech company's prospects. Microsoft's price-to-earnings (P/E) ratio has decreased over 26% in the past year and appears to be trending down, indicating that the company is a buy at its current price. Tech stocks may have fallen out of favor since the height of the pandemic, but with its current valuation, a booming cloud services business, and growing gaming aspirations, Microsoft looks like a winner that's trading at a discount.
