Microsoft: Creating Its Own Metaverse with Activision Acquisition

It seems that Microsoft (MSFT) has decided that after losing out on Search to Google and not being as dominant on social media as Meta (FB) and Twitter (TWTR), it will not lose out on the metaverse.

To make sure that it can compete in the metaverse, it is purchasing Activision Blizzard (ATVI) in a $68.1 billion all-cash deal. The instant benefits are quite clear. Microsoft gets access to games like Call of Duty and Diablo, and Activision Blizzard games will be accessible on mobile devices everywhere through Microsoft’s monthly gameplay service known as Game Pass. 

As well as just vaguely being able to create its own version of the metaverse in the games that it has acquired through the Activision Blizzard purchase, there are three areas where the acquisition will concretely give Microsoft an edge over the other internet titans as the metaverse becomes a reality.

The first is it will dramatically increase the amount of gaming content that Microsoft will own. The second is that MSFT will gain Activision Blizzard’s 400 million active monthly players. The third is that MSFT will be able to expand the reach of each of the games currently owned by Activision Blizzard because it has the Xbox cloud infrastructure in place now in 26 countries. MSFT can make each game available on any mobile device by including it in the monthly game pass that was already discussed.

Recent Results and Dividend

Microsoft’s stock has been trading between $224.26 (the 52-week low set on March 04, 2021) and $349.67 (the 52-week high set on December 27, 2021). 

MSFT brought in revenues of $184.9 billion over the last twelve months with a net income of $71.19 billion. 

The company has reported second-quarter 2022 earnings of $2.48 per share, beating analyst estimates of $2.32 per share by $0.16. It has also reported $8.87 in earnings per share for the previous four quarters, beating analyst estimates of $8.10 by $0.77 during that period. 

Microsoft currently pays a dividend of $0.62 per quarter. This is a dividend yield of around 0.8%, and it grew 10% during the last year. This great growth in the dividend has been sustained at this level for several years. One really nice thing about the dividend growth is that it is outpacing inflation, so you are gaining real purchasing power over time by owning this asset.

The company has a solid balance sheet. Microsoft has a current ratio of 2.2, so it has enough current assets on hand to pay its bills for more than two years at its current burn rate. 

When I calculated the stock’s intrinsic value by modeling discounted cash flows, I pegged it at $988. I believe that the company’s continued growth in top-line revenue, net income, earnings per share, as well as the company’s pending acquisition of Activision Blizzard, will act as a catalyst for the market to catch up to the stock’s intrinsic value.   

Wall Street’s Take

Turning to Wall Street, MSFT stock has a Strong Buy consensus rating, based on 28 Buy ratings assigned in the past three months.

The average Microsoft price target of $375.23 implies 25.4% upside potential.

Of the 130 bloggers that have blogged about Microsoft, 92% of them are bullish. However, only approximately 68% of bloggers are bullish on the technology sector.

Conclusion

I am bullish on Microsoft after its planned acquisition of Activision Blizzard. This acquisition helps Microsoft create its own version of the metaverse and allows it to gain access to much more gaming content to push out across its cloud gaming infrastructure.

I am also bullish on this stock because of the underlying fundamentals, including its intrinsic value and the strength of its income statement and balance sheet. I believe that management is committed to not making the same mistakes as it has in the past and will capitalize on the internet’s creation of the metaverse.

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