Microsoft's (MSFT) announcement that it is acquiring Activision (ATVI) has caused a ripple effect across the gaming sphere, as the move could cause a run on big entertainment companies snapping up gaming studios.
Microsoft paid $75 billion for Activision, representing a potential 50% upside from the company's market cap. That type of premium has publicly traded video game stocks like Electronic Arts (EA) and Take-Two Interactive (TTWO).
A 50% premium on Electronic Arts' nearly $40 billion market cap would represent a $60 billion price tag. Take-Two's $20 billion market cap could fetch it $30 billion in a sale.
Investors are noticing and pouring into those two stocks Wednesday. Electronic Arts shares were up 2.4% while Take-Two jumped 7.3% during the afternoon session.
Microsoft-Activision deal could spark a gold rush of other mega-media players to bolster their “metaverse” content with a videogame publisher acquisition of their own, some experts say.
EA's Product Pipeline
Electronic Arts has benefitted greatly during the Covid-19 pandemic with the company increasing EPS sharply over the past two years.
In 2020, EA reported a profit of $4.81 per share. In 2021, that number jumped to $5.75 per share. For 2022, the company is expected to report earnings of $7.01 per share.
Revenue is expected to jump to $7.67 billion in 2022 from $5.21 billion in 2020.
The company has multiple gaming tentpoles like the Madden NFL series, FIFA series, the Sims series and Apex Legends in its stable.
Take-Two's Pipeline
Take-Two's trajectory has been the opposite over Electronic Arts' over the past two years.
The company's profit jumped to $6.92 in 2021 from $5.32 per share in 2020. However, the company's profit is expected to drop to $4.89 per share this year, according to FactSet.
Take-Two's top games include the popular NBA 2K series, Grand Theft Auto and Red Dead Redemption.
The company has been active in the acquisition market this year, purchasing mobile game developer Zynga for $12.7 billion.
Amazon, Apple, Netflix and Disney Viewed as Potential Suitors
Microsoft is making an even bigger push into gaming with its acquisition of Activision, with the nearly $70 billion price tag being Microsoft's biggest acquisition ever by far (second place is the company's 2016 acquisition of social media platform LinkedIn for $26 billion).
“We believe the other large publishers are likely acquisition candidates,” Jefferies analyst Andrew Uerkwitzsaid said in a note reviewed by Marketwatch. “We do not expect there will be an over-the-top bid on Activision. If large tech is serious about interactive entertainment, the next few months will surely answer those questions. We view Amazon (AMZN) & Sony (SNE) as the most likely to be acquisitive."
Ubisoft Entertainment SA UBI, Take-Two, EA, and Sony “should see some form of valuation expansion in my view” as Walt Disney Co. (DIS), Netflix (NFLX) Amazon, Meta Platforms Inc. (FB) and Apple Inc. (AAPL) “could look to make a move, and Disney or Apple make most sense,” Mizuho analyst Jordan Klein Klein wrote to its clients.
And while Take-Two is set to buy Zynga, Klein thinks “it would not stop a big player like Amazon, Apple, Disney in my view” from making a play for Take-Two.
