Why Activision Blizzard Stock Bounced Back Today – The Motley Fool

Date:

- Advertisement -

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Motley Fool Issues Rare “All In” Buy Alert
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
Shares of video games maker Activision Blizzard (ATVI 1.70%) fell more than 4% on Friday in response to news that the Federal Trade Commission (FTC) may be preparing to file suit to block Activision’s acquisition by Microsoft (MSFT -2.31%) in the next few weeks. Today, the stock is bouncing back a bit, rising 2% immediately after opening for trading this morning. It’s still up 1.5% as we round the 10 a.m. EST mark.
The reason: Wall Street thinks the FTC will not in fact block the merger.
Tic-tac-toe, three in a row, Wall Street analysts JP Morgan, Morgan Stanley, and Wells Fargo unanimously assigned $95 price targets to Activision stock this morning — not coincidentally, the precise dollar value of the all-cash bid that Microsoft made for Activision in January. (A fourth analyst, Truist, said it has a “bull case” valuation of $95 on Activision stock, but its mid-range valuation, accounting for risks that the merger will not go through, is closer to $81, according to ratings-watcher TheFly).    
Of the three more bullish analysts, Morgan Stanley and Wells Fargo were most bullish, upgrading Activision stock to “overweight.” While unable to predict whether the FTC will succeed in blocking the deal, both bankers insisted Activision is worth owning even if it remains independent. Wells even assigned a $76 valuation to the stock in that scenario, hinting that with Activision stock selling for $74 today, it sees essentially no risk in buying the stock at these prices.
JP Morgan, in contrast, was a bit more cautious. While its $95 price target hints at which way it sees this thing going, the analyst declined to raise its rating on Activision stock past “neutral,” while it waits to see which way the FTC will jump.
Personally, I’m even more cautious than JP Morgan, however. While the potential for winning a 28% windfall if and when the Microsoft merger closes is certainly enticing, in the event the FTC forbids Microsoft from buying Activision, I think this stock could be worth a lot less than the $74 it fetches currently.
Consider this: With trailing earnings and trailing free cash flow (FCF) are essentially equal at $1.7 billion, Activision’s current $57.5 billion market capitalization values the stock at nearly 34 times both earnings and FCF.
That might be fine if Activision were growing its profits at strong, double-digit percentile rates. But according to data from S&P Global Market Intelligence, Activision has only managed to grow earnings at an average rate of 8.5% per year over the last five years and, according to analysts polled by S&P Global, will only grow earnings at 4.2% per year over the next five years!
That’s not a lot of growth with which to justify a 34 times price-to-earnings (P/E) ratio, unfortunately. Unless you’re reasonably certain that Microsoft will succeed in buying Activision, it’s probably best to avoid this stock.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard and Microsoft. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Market-beating stocks from our award-winning analyst team.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.
Discounted offers are only available to new members. Stock Advisor list price is $199 per year.
Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.

Market data powered by Xignite.

source

- Advertisement -

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Share post:

Subscribe

ADVERTISEMENT

Popular

More like this
Related

IMF: South Africa needs decisive efforts to cut spending

South Africa needs more decisive efforts to cut spending...

World Bank sounds alarm on ‘historical reversal’ of development for poorest nations

Half of the world's 75 poorest countries are experiencing...

Ghana fails to reach debt deal with international bondholders

Ghana has failed to strike a deal with two...

Nigeria files tax charges against Binance after executive flees custody

Nigeria has filed tax evasion charges against cryptocurrency platform...