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Dylan Sanchez
Dylan Sanchez

Is Activision Blizzard A Good Stock To Buy

On Jan. 18, news broke that Microsoft (MSFT 1.50%) had agreed to acquire video game developer Activision Blizzard (ATVI 0.83%) in a cash deal valued at $68.7 billion. That's equal to $95 per share, which caused the stock price of Activision Blizzard to spike from the low $60s it was trading at.

is activision blizzard a good stock to buy

With Activision now trading around $80 a share, there's a gap between where the stock is and Microsoft's agreed price to buy it. That's a potential arbitrage opportunity, offering a shot at buying the stock today and pocketing the roughly $15 difference per share once the acquisition closes. But is it that simple? Here's what investors need to know.

Microsoft has agreed to pay $95 per share for Activision once the deal closes, so why isn't the stock at that price? The gap in the share price reflects the uncertainty the market feels about the deal. In other words, the market is pricing in the chance that the acquisition doesn't close.

In the price chart below, you can see how the stock spiked in early January on the news of the deal. The stock had been selling off before that, primarily due to controversy around the company's management team and alleged misconduct in the workplace.

This is the question that investors ultimately need to answer for themselves. If the deal does close, buying the stock at $80 today gives you a potential 18.7% gain at the $95 per share acquisition price. If the deal falters, the downside is unknown because we cannot predict price action. But falling back to $64, its approximate price before the deal, would represent a potential downside of almost 25%.

If you're solely looking to play the acquisition as a trade, I'm not sure that the risk versus reward is worth it for most investors. The current sell-off among growth and technology stocks has many great stocks well off of their highs, and investors might be better off looking elsewhere to invest their money.

For a while, it seemed like a good idea to follow Buffett's lead, since Activision's shares consistently remained below $95. But as of this writing, its stock trades at roughly $75 and the deal faces a growing number of regulatory hurdles. China's antitrust regulators rejected Microsoft's initial request for approving the deal, European regulators launched a new probe, and the U.S. Federal Trade Commission sued Microsoft to block the acquisition.

Before Microsoft placed its bid for Activision Blizzard, the video game maker's stock had already declined nearly 30% over the previous 12 months. Like most of its industry peers, it faced a tough post-pandemic slowdown as people played fewer games and spent more time outside again.

As a result, analysts expect Activision's net bookings to rise 29% year over year in the fourth quarter and only decline 3% for the full year. Next year, they expect its net bookings and earnings to increase 19% and 29%, respectively, as those newer titles gain more momentum. We should take all those estimates with a grain of salt, since Activision stopped providing guidance after agreeing to be bought by Microsoft. But based on those forecasts, Activision Blizzard's stock looks reasonably valued at 20 times forward earnings and 6 times next year's net bookings.

This deal isn't dead yet, but I wouldn't buy Activision's stock simply because it might bounce back to $95 if the acquisition is approved. Its downside might be limited at these valuations, but the video game sector could remain out of favor for the foreseeable future. There are also plenty of more promising tech stocks to choose from in this bear market.

Whether you should invest in ATVI should be based on your risk tolerance, experience in the markets, investing goals and view of the stock. Always conduct your own due diligence, looking at the technical and fundamental analysis, latest news and market commentary. Remember that past performance does not guarantee future returns, and never trade money you cannot afford to lose.

Activision Blizzard is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 27% out of more than 250 industries) further supports the growth potential of the stock.However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the industry has underperformed the broader market, as you can see below:

Purchasing this stock right now is an interesting question because Microsoft (NASDAQ:MSFT) has offered to buy the gaming company for $68.7 billion, or $95 per share. However, antitrust regulators in the U.S. and abroad have gotten involved. Furthermore, a large tickdown of technology stocks could also affect your decision as an investor, as well as a lack of demand for games by this particular company.

It's possible that the deal may not be approved, which could send the stock price careening downward. Warren Buffett, the Oracle (NYSE:ORCL) of Omaha, on the other hand, has increased his stake in the company, confident that the deal will close. Berkshire Hathaway (NYSE:BRKa) now owns about 9.5% of Activision Blizzard Inc. shares.

If you think of it as a flip of the coin, if Activision Blizzard gets taken over, it would lead to a possible more than 20% gain for individuals who have scooped up the stock. If the merger falls through, you're looking at a deep drop in the stock, even more than what owners of these shares have recently seen. Furthermore, it's also important to keep in mind that Activision Blizzard Inc. isn't without its competition. It can point to several competitors, including Netflix Inc (NASDAQ:NFLX), Meta Platforms (NASDAQ:META) and Electronic Arts (NASDAQ:EA). Each has a lot of irons in the fire.

In the past three months, Activision Blizzard insiders have sold more of their company's stock than they have bought. Specifically, they have bought $0.00 in company stock and sold $694,490.00 in company stock.

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One good thing for Microsoft shareholders is that the deal represents most of its cash and a small proportion of its market capitalization. As CNBC reported, the purchase price amounts to 85% of its cash and short-term investments and 3% of its $2.3 trillion stock market capitalization.

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I bought my first stock in 1966 and then obtained my BS in banking in 1971 and MBA in corporate finance in 1972 from NYU. A study cycles began in the same year. A 9-year psychotherapeutic training apprenticeship followed. Many of my concepts concerning crowd psychology derive from this period. From 1972 to 1990, I worked on both the buy and the sell sides of Wall Street. From 1990 to 2004, I was a technology fund manager, strategist, and a member of the currency hedging committee with the Abu Dhabi Investment Authority. Since 2004, I have operated a service from Vienna, Austria. I am a member of the Kenos Circle, a Vienna-based group of futurists. I combine fundamentals with cycles through unique software as an aid in market forecasting. The influence of cycle theorists such as Ed Dewey, Charles Jayne, George Lindsay, and R.N. Elliott have been most valuable. 041b061a72


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