What To Make Of Activision Blizzard (NASDAQ: ATVI)

It’s been a wild few months for shares of Activision Blizzard (NASDAQ: ATVI) as they’ve whipped from above $80 to below $60 and back again. Investors of the video game maker have been left guessing what will become of Microsoft’s (NASDAQ: MSFT) acquisition plans, while at the same time video game sales have been steadily dropping for much of the year so far. But the California headquartered company released their Q1 earnings yesterday morning, which gave Main Street and Wall Street alike a glimpse into the internal engine. 

On the face of it, the numbers weren’t great. Non-GAAP EPS came in at $0.64 which was off the expected $0.72, while revenue also missed and showed a contraction of 22% year over year. This will be remembered as a sore miss and a poor quarter, but one that was perhaps not all that unexpected. We’ve known for a number of months now that the pandemic fuelled boom in gaming has been rapidly decelerating, with the monthly video game sales figures confirming so. In March, the year over year numbers shown were down for a fourth straight month with broad drops seen across multiple categories. 

Interestingly, investors were told that due to the pending acquisition by Microsoft, for $95 per share, the company would not be hosting a conference call, issuing a presentation, or providing any guidance. Still, there were some worthwhile comments from the CEO Bobby Kotick.

Acquisition 

Kotick noted with the results that “as we look to the future, with Microsoft’s scale and resources, we will be better equipped to grow existing franchises, launch new potential franchises and unlock the rich library of games we have assembled over 40 years. Our 370 million players around the world and workplace excellence remain our focus. For investors, our recently announced transaction is the culmination of three decades of providing superior shareholder returns.”

Activision shares were flat in Tuesday’s pre-market session which suggests investors are a bit nonplussed with the comments and the numbers. To be fair, most eyes will be on the stockholder meeting scheduled for this Thursday where there will be a vote on the Microsoft acquisition. Activist shareholder group SOC Investment will be urging Activision Blizzard shareholders to vote against it, as they believe it doesn’t give a fair value to Activision and its future earnings potential. In a recent note they said “we are skeptical that any transaction with Microsoft (or a similar acquirer) would be viable, given the shift in the climate of antitrust enforcement, as well as evident sources of potential harms to competition stemming from the merger."

We’ll have to see how Thursday’s meeting goes, but after yesterday’s results, it could be that $95 price tag suddenly doesn’t look so shabby. Even if it is voted for, it will still have to get through the FTC hoops, and they’ve already raised a few questions meaning the deal is under more than the usual amount of scrutiny. But Microsoft will be keen to make it happen. As was recently written, “from the side of Microsoft, there are numerous considerable advantages of incorporating Activision's business. Firstly, this will immediately be accretive to Microsoft's earnings. Adding Activision will bring Call of Duty, World of Warcraft, Overwatch, Diablo, and Candy Crush to Microsoft’s portfolio of games, and vault Microsoft into third place among the globe’s game developers.”

Looking Ahead

Microsoft CFO Amy Hood recently went so far as to outline their monetization plans in the event the acquisition is successful. “Key measures of our success include accelerated revenue growth from Activision Blizzard's game portfolio as we extend content to more devices, resulting in increased engagement and monetization across the Xbox platform; as well as additional growth in Game Pass subscribers as we attract new players wherever they play and continue to build one of the most compelling and diverse lineups of AAA content available.”

It sounds good, and you’d have to back Microsoft to execute on it, but much will depend on this week’s shareholder meeting. It could well be the case that investors are tired of the ups and downs that Activision stock has experienced in recent years, and feel Microsoft offers a guiding hand that is much needed.