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Stock Analyst Update

Microsoft Acquires ZeniMax, Bolsters Gaming Portfolio

Our fair value estimate remains for the wide-moat company, but we think the acquisition suggests gaming is becoming more important internally.


Microsoft (MSFT) announced the acquisition of ZeniMax Media, owner of Bethesda Softworks, one of the largest privately held game developers and publishers in the world. The all-cash deal for $7.5 billion is expected to close between January and June 2021. While no financial metrics were provided for ZeniMax, Microsoft expects the deal to have "minimal impact" on non-GAAP operating income in fiscal 2021 and 2022. Bringing ZeniMax’s various studios into the fold ups Microsoft’s internal studio count from 15 to 23. To the gaming world, we think this deal, combined with recent Xbox introductions, emphatically underscores that the gaming segment is important to Microsoft and the company expects to remain a leader for years to come. Overall, we think adding content to the gaming platform is strategically important, so we view the deal as strategically sound. Our $228 fair value estimate and wide moat rating are unchanged.

We believe Bethesda’s titles, including The Elder Scrolls, Fallout, Doom, Quake, and Wolfenstein, are iconic and will be important additions to the GamePass catalog, which now boasts 15 million subscribers. Ultimately, a $7.5 billion transaction is immaterial to Microsoft. For comparison, Epic Games’ June 2020 financing valued it at about $17 billion based on an estimated $5 billion in revenue, which implies a price/sales multiple of 3.4 times for that deal, while publicly traded analogs such as Activision, Electronic Arts, and TakeTwo, among others, trade at a median price/sales of 5.9 times. Using these multiples as guardrails suggests ZeniMax's revenue could be in a range of $1.3 billion-$2.2 billion for calendar 2020. At the midpoint, this represents about 1% of Microsoft’s revenue, which, when coupled with a cash hoard of $136.5 billion, demonstrates that the transaction is clearly not material to the financial operations of Microsoft. We do, however, think it suggests gaming is becoming more important internally.

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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