Microsoft Building Gaming Powerhouse; FVE Still $345

Wide-moat Microsoft (MSFT) has announced its largest deal ever: the acquisition of Activision Blizzard (ATVI), one of the biggest video game publishers in the world, in an all-cash transaction valuing the target at $68.7 billion in enterprise value, or $95 per share. Given Microsoft's $2.3 trillion market capitalization, we do not view this deal as transformative, especially since stand-alone Microsoft was already a key player in video games. While Microsoft is paying a 45% premium to Activision Blizzard's previous closing price, the $95 valuation squares with Morningstar's $92 predeal fair value estimate and management expects the deal to be immediately accretive to non-GAAP EPS. We are maintaining our $345 fair value estimate for Microsoft.

We like the acquisition, as Microsoft bolsters its already strong gaming division with an iconic library that includes traditional console game developer Activision, PC developer Blizzard, and mobile developer King. Microsoft has minimal exposure to mobile, the largest gaming platform, so we think King and its Candy Crush franchise will instantly provide mobile chops. Activision has some of the most popular games of all time under its umbrella, including the Call of Duty franchise and World of Warcraft, which changed the gaming industry in 2004 with not only its massively multiplayer game but also its monthly subscription model.

Microsoft intends to add as much Activision Blizzard content as possible to Game Pass, which has 25 million subscribers. Activision Blizzard has 400 million monthly active users. We tend to think the purpose of deals like this is to gather exclusive content. However, part of the value of Activision Blizzard is that it develops games across platforms and consoles, so we will be curious to see how much content excludes PlayStation users in the next few years. We also see hype building around the metaverse and believe this deal cements Microsoft's position as the most comprehensive metaverse play over the next decade.