Activision Blizzard Stock Analysis


Activision Blizzard Stock Analysis

Business Description:

  • Products include premium full-games, free-to-play offerings, in game-contents to purchase, and subscriptions across the 3 segments

Activision Blizzard Stock Analysis

Merger:

  • All cash transaction by Microsoft for $68.7 billion or $95.00/share

  • Expected to close in Microsoft FY23 (ending in June 2023)


Catalysts:

  • Rapid growth of the gaming market

  • Brand recognition

  • Arbitrage opportunity with current spread of 20%



Risks:

  • Concentration of revenues on a few franchises (top 3 franchises in 2021 accounted for 82% of sales)

  • Possible Antitrust probes on the merger


Financial Analysis:


Activision Blizzard Stock Analysis

Valuations:

  • My personal Biases:

  • Confident on the merger going through

  • Actively looking for merger arbitrage deals


  • Assumptions:

  • Revenue growth of 5% per year (a little below 5 last years) for the next 5 years

  • FCF growth of 6% per year (improving margins) for the next 5 years

  • Terminal growth rate of 2%

  • Discount rate of 10% (great company with great balance sheet)

  • Margin of safety of 20%


Activision Blizzard Stock Analysis

  • Exit Multiples based on P/FCF Ratio (20-40 in the last 10 years)

  • Sales 20% higher in bull case and 20% lower in bear case

  • Shares outstanding stays the same

Activision Blizzard Stock Analysis

  • This is the scenario where ATVI is a long-term investment

  • ATVI looks overvalued

  • Let’s look at the arbitrage opportunity


Activision Blizzard Stock Analysis







  • Expected return of 11% in a year

  • In case the deal doesn’t go through, the shares of ATVI are expected to drop to $60 and is a good deal

Activision Blizzard Stock Analysis

Conclusion

  • Great company at an overvalued price

  • Arbitrage opportunity with expected returns of 11%

  • In case the deal fails, might become an attractive long-term investment

  • Definitely a BUY at such a price


Activision Blizzard Stock Analysis

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