Microsoft’s acquisition of Activision Blizzard (NASDAQ: ATVI) is a smart move.
To explain, Microsoft (NASDAQ: MSFT) can add Activision’s enormous catalog of games to Xbox. Activision’s games catalog includes Call of Duty, World of WarCraft, Overwatch, Diablo, King’s Quest, Guitar Hero, StarCraft, and Crash Bandicoot to name a few. In addition, Statista estimates Activision’s online games had 26 million monthly active users in the third quarter of 2021.
In particular, Microsoft (MSFT) could add Activision Blizzard’s players to the growing Xbox Live platform. Statista estimates Xbox Live had 100 million monthly active users in December 2020. Moreover, Xbox Live’s monthly active user base grew from 90 million in April 2020 and the fourth quarter of 65 million in the fourth quarter of 2019.
A Gaming Industry Behemoth
An Activision Blizzard (ATVI) acquisition will turn Microsoft (NASDAQ: MSFT) into a gaming industry behemoth, PC Gamer speculates.
However, the US Justice Department could use antitrust laws to block the acquisition, PC Gamer speculates. Specifically, the Federal Trade Commission (FTC) could block the merger or force Microsoft to sell some Activision assets.
However, I consider the $68.7 billion Microsoft is spending on Activision Blizzard money spent. I think Activision’s 26 million active users justify the risks of antitrust action.
I think the additional Activision Blizzard’s games and players to Xbox Live could make Microsoft a dominant player in games. Moreover, Microsoft can add enormous amounts of float to its cash flow with Activision Blizzard. I think Microsoft is buying Activision Blizzard for the cash and not the Metaverse fantasy.
How Warren Buffett Explains Microsoft’s Activision Blizzard Acquisition
I think Warren Buffett’s concept of float explains Microsoft’s Activision (ATVI) acquisition.
In Buffett’s world, float is a stream of cash customers have to pay a company regularly to receive a good or service. For example, insurance premiums. The advantage with float is a company can use it for anything to pay bills, finance research and development, finance expansion or acquisition, or borrow against.
Xbox Live generates float for Microsoft (MSFT). In detail, an Xbox Live Gold subscription costs $9.99 a month, $24.99 for three months, or $39.99 for six months. Hence, if Statista’s estimate of 100 million Xbox Live customers is correct and each of those customers’ orders Xbox Live Gold, I calculate Microsoft could make $999 million, almost $1 billion, a month from Xbox Live subscriptions. Furthermore, I calculate Microsoft could make $11.988 billion a year from Xbox Live subscriptions at a rate of $9.99 a month.
With Activision Blizzard, Microsoft could add Call of Duty, Overwatch, World of WarCraft, and other games to Xbox Live Gold. That could add another 26 million players to Xbox’s ecosystem and generate more float for Microsoft. I calculate Microsoft could make an extra $259.74 million a month if it could all the Activision Blizzard monthly players to use Xbox Live Gold.
I think it is the float the game subscriptions generate Microsoft wants from Activision Blizzard. Not the Metaverse. The real reason Microsoft wants Activision is the cash.
Activision Blizzard can generate enormous amounts of cash
Activision Blizzard (ATVI) can generate enormous amounts of cash from its games. For example, Activision reported a quarterly operating cash flow of $521 million, an investing cash flow of $73 million, and a quarterly ending cash flow of $513 million on 30 September 2021.
Impressively, Blizzard also reported a quarterly ending cash flow of $9.287 billion on 31 March 2021. Additionally, Activision Blizzard had $10 billion in cash and short-term investments on 30 September 2021.
Additionally, Blizzard is a proven generator of profit, revenue, and income. Activision Blizzard reported a quarterly gross profit of $1.543 billion, quarterly revenues of $2.07 billion, and a quarterly operating income of $824 million on 30 September 2021.
Buying Activision Blizzard will allow the Microsoft Money Machine to generate more cash. However, Activision brings enormous value to Microsoft.
The Enormous Value at Activision Blizzard
Activision Blizzard (NASDAQ: ATVI) can bring enormous value to Microsoft. For example, Activision had total assets of $23.977 billion and $10 billion in cash and short-term investments on 30 September 2021.
In contrast, Activision had $3.607 billion in total debts on 30 September 2021. Therefore, Activision is a healthy company with more cash than debt. Microsoft gets the cash and assets besides some of the biggest names in gaming.
Is Microsoft the new Berkshire Hathaway?
I think the Activision Blizzard deal shows Microsoft (MSFT) rivals Berkshire Hathaway (NYSE: BRK.B) in its ability to accumulate cash and value.
Indeed, I will argue Microsoft is the new Berkshire Hathaway. To explain, Microsoft is a cash-rich company I consider a value investment. For example, Microsoft had $130.615 billion in cash and short-term investments on 30 September 2021. In contrast, Berkshire Hathaway had $149.198 billion in cash and short-term investments on the same day.
Similarly, Microsoft reported a quarterly ending cash flow of $19.165 billion and a quarterly operating cash flow of $24.54 billion on 30 September 2021. Thus, Microsoft can generate enormous amounts of cash without Activision.
Appealingly, you can consider Microsoft a new Berkshire Hathaway that pays a dividend. To explain, Microsoft will pay three 62₵ quarterly dividends in 2022. Moreover, Microsoft’s dividend grew from 56₵ on 18 August 2021.
Overall, Microsoft shares offered a $2.48 forward dividend and a 0.84% forward dividend yield on 25 January 2022.
Is Microsoft a Value Investment?
Hence, I think Mr. Market fairly priced Microsoft at $288.49 on 25 January 2022. Microsoft offers enormous share value growth. Its price rose from $229.51 on 25 January 2021. In comparison, Mr. Market paid $79.12 for Activision Blizzard on 25 January 2022. Activision’s share price fell from $93.40 on 25 January 2021.
Importantly, Microsoft is cheaper than Berkshire Hathaway (NYSE: BRK.B). Mr. Market paid $307.42 for BRK.B on 25 January 2022. Hence, Microsoft is cheaper than Berkshire Hathaway and it pays a dividend.
I recommend that investors in search of value investigate Microsoft because of its ability to acquire moneymaking companies. If you want a modern value investment, Microsoft is worth investigating.
Originally published at https://marketmadhouse.com on January 25, 2022.
