With a flurry of earnings reports and an acquisition announced within a span of only four days last week in the interactive-entertainment space, traders seeking a stake in the ongoing explosive growth of this new market have been reassessing the landscape. Questions include: Is Activision's acquisition of King Entertainment a good one? Will Zynga ever affect a turnaround? And will Glu Mobile repeat the Kim Kardashian success with its raft of upcoming celebrity-based games?
Let's take a look at the space and each of these stocks.ATVI data by YCharts
Activision Blizzard (ATVI) -- Hold/Sell
It was a one-two punch delivered by Activision Blizzard, as the week started with the company announcing an acquisition agreement with King Digital Entertainment (KING) on Monday (Nov. 2), and ended on Friday (Nov. 6) with the company reporting a much-better-than-expected third-quarter earnings report. Of the two events, the acquisition of King has investors buzzing most.
If approved by King's shareholders and the Irish High Court, the addition of King will move Activision to the world's No. 2 (by revenue) interactive-entertainment company, behind China's Tencent Holdings. The $5.9 billion, all-cash deal would raise Activision's user base to 550 million, moving it up to the fourth position behind behemoths Facebook (No.1) and YouTube (No.2), with WeChart/Webdn holding the third spot.
In addition to acquiring King's $920 million of cash, Activision's expects a 30% bump to revenue and earnings next year from the acquisition, as well as a "significant" boost to free clash flow, which was recently reported as reaching $180 million for the third quarter.
However, the synergies between the two companies don't match very well, which has raised several troubling questions, such as: Is Activision's acquisition of King merely an easy means of entering the mobile game space? How will Activision solve King's low hit rate (2.2%) and dangerously declining user base? Strategically, how will Activision's hardcore customer demographics compliment King's casual (and increasingly reluctant) gamers? No one seems to have answers. Even Activision CEO Robert Kotick doesn't have any. From a release about the acquisition:
"A big part of the opportunity [from the purchase of King Entertainment] is to explore the intellectual property that exists at Activision Blizzard and see if it makes sense in [the mobile games network]."
Unless Activision can show investors where this acquisition makes sense to the future of both enterprises, the company's lofty price-to-sales ratio of 5, anticipated long-term debt of more than $6 billion (after the deal is complete), and fully-priced valuation, offer no compelling reason to buy the company's shares. Therefore, should shareholders hold or sell? It's a toss up.