Activision Stock Up 24% in January – Time to Buy ATVI Stock?

The price of Activision stock has surged 24% so far this month following the announcement of a takeover by Microsoft in an all-cash deal that values the parent company of the popular game World of Warcraft at $68.7 billion or $95 per share.

In a joint statement released yesterday, the companies announced that they reached an agreement in which the Redmond-based tech firm will acquire Activision Blizzard in a move that seeks to further strengthen Microsoft’s competitive position in the up-and-coming metaverse industry.

“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms”, stated Satya Nadella, the Chief Executive Officer of the company founded by Bill Gates.

Activision shares surged 26% during yesterday’s stock trading action after the deal was announced as investors seem to be confident that the deal will obtain regulatory approval. According to the statement, the transaction is expected to be settled at some point in 2023. The Board of Directors of both companies have already approved the deal.

By the end of the third quarter of the 2021 calendar year, Microsoft had $130.6 billion in cash and equivalents. At $95 per share, Microsoft is acquiring the company at a 22.2% premium compared to ATVI’s market price the day before the announcement but still 9% below its 52-week high of $104.5 per share.

What could be expected from this gaming stock following this announcement? In this article, we will be assessing the price action and fundamentals of Activision stock to outline plausible scenarios for the future.

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Activision Stock – Technical Analysis

Back in November when I last wrote about Activision, I highlighted that a break below the $62 level could lead to a sizable decline to the low 50s. Back then, the stock was experiencing some negative momentum amid allegations of a hostile work environment by its employees and delays in the release of key titles.

This is exactly what happened days after as the stock went down to $56 per share. However, Activision stock bounced shortly after hitting that threshold and went on to rally for nearly 15 days in a row – possibly as rumors about the deal started to circulate.

Yesterday’s uptick has pushed the price above the stock’s short-term and mid-term moving averages only days after the 50-day and 200-day SMA posted a golden cross. Trading volumes were particularly elevated as well as they exceeded the 10-day average by more than 10 times.

Meanwhile, the Relative Strength Index (RSI) is flashing overbought at 80 while the MACD has continued to move higher into positive territory and posting its highest reading since February 2021.

Moving forward, since the price closed yesterday’s session 15% below Microsoft’s bid, there is still some upside potential ahead unless the transaction experiences regulatory pushback.

Activision Stock – Fundamental Analysis

The pandemic lifted Activision’s revenues after the unexpected decline that the firm’s top-line results experienced back in 2019. Meanwhile, the market seems to be expecting that this tailwind will endure even after the virus situation is over as sales are forecasted to grow to $9 billion or 4% above the company’s closing figure for 2021.

Adjusted earnings per share for the firm are expected to land at $3.82 in 2022 while Activision Blizzard produced $2.8 billion in free cash flows in the past 12 months resulting in an FCF margin of 31.1%.

Based on that $9 billion forecast, the company should produce at least $3 billion in free cash flows this year resulting in a P/FCF multiple of 23x based on Microsoft’s offering price and 21x based on yesterday’s closing price.

At that price, Microsoft (MSFT) is acquiring the firm at a bargain considering its strong brands, which include Call of Duty and World of Warcraft and loyal user base. For Microsoft, the deal is quite attractive and may generate synergies instantly.

For Activision shareholders is not as appealing as it may have been to hold the shares for the long-term as the multiples being paid relative to the company’s strong track record of free cash flow growth should have prompted the Board to raise the price or reject the deal altogether.

All things considered, things could have gone better for Activision shareholders. Market participants seem to be confident that the deal will go through. If it does, at least shareholders will get the full bid price. If it doesn’t it would not be so bad in the long-term either. With this in mind, those who already own some shares in ATVI should hold them until any of those two scenarios occur.

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