Despite Microsoft Deal, Deutsche Bank Upgrades Video Game Stocks

According to Deutsche Bank, Activision Blizzard can make money for its stockholders whether or not the Microsoft acquisition is completed.

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Analyst Benjamin Soff increased his price objective for the gaming stock by $7 to $90 and upgraded it from hold to buy. With respect to Wednesday's finish, the target share price represents an increase of 15.1%.

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Microsoft offered to pay $68.7 billion in cash to acquire the "Call of Duty" developer in 2022. But, the deal has hit snags, and some are unsure if it will be able to close because of authorities' concerns about the impact on the market.

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Soff wrote in a note to clients on Thursday: "We remain skeptical on the regulatory approval process for Microsoft's acquisition of Activision due to the increasing scrutiny over big tech by regulators across the US, UK, and Europe." Notwithstanding this, we think Activision is well-positioned on its own and that its well-capitalized balance sheet can sustain enticing shareholder returns.

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The UK's Competition and Markets Authority issued preliminary findings on the deal last week, stating that it could "substantially lessen competition in gaming consoles and cloud gaming services in the UK." The organization also stated that Microsoft might benefit financially by moving "Call of Duty" to the Xbox exclusively and by making other games only available through the cloud.

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According to the filing, alternative solutions include preventing the merger, resolving specific aspects of Activision Blizzard's operations through divestitures, or applying behavioral remedies. Soff asserted that he believes a settlement or behavioral remedy, such as Microsoft's offer to provide Call of Duty on PlayStation to Sony for ten years, would be the best and most likely course of action.

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Soff believes there is a way to provide strong shareholders even though the failure of the sale could result in a short-term sell-off.

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Soff anticipates health growth despite challenges to consumer spending and believes the company's 2023 releases will be financially successful. He claimed that despite becoming more picky as the cost of living rises, consumers are still engaging with its brands.

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He claimed that "Call of Duty" especially stole market share away from other games during the holiday season, and the 2023 premium release ought to support momentum.

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The company has been able to buck bad mobile gaming trends, with Soff pointing to Candy Crush's January momentum as one example. He even said brand names specific to Blizzard began meaningfully making a contribution this year, driven by the strong performance of "Overwatch 2," "World of Warcraft," "Dragonflight," and "Diablo Immortal."

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Soff estimated that operational earnings would increase 17% and net bookings would increase 12% overall in 2023. This is higher than the predicted growth rate of "at least" upper single digits.

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