Activision (ATVI) is buying King Digital (KING) for $5.9 billion, and analysts can’t figure out whether they love it or hate it — or if it even matters.
However, with ATVI fully valued, buying King Digital will add significant shareholder value for Actvision stock and help the company dominate mobile gaming.
Activision Blizzard is expected to grow revenue 7.4% next year and earn $1.58 per share. Therefore, it currently trades at 23 times FY2016 EPS, which isn’t too expensive, but it’s certainly not cheap. Based on this EPS multiple, there isn’t much stock upside for ATVI over the next year.
However, acquiring King Digital could be a game-changer that adds significant upside to Activision stock. Why? Because ATVI is getting a huge discount on the King Digital deal.
If we remove KING’s $786 million in cash & equivalents from Activision’s offer price, ATVI would be paying about $16.5 per share for King Digital. That’s less than nine times this year’s expected EPS of $1.85.
As a result, ATVI will increase its revenue by 30%, drive its profit 60% higher, and is getting this for less than nine times earnings minus cash. That’s a game-changer for Activision stock, as King Digital would need another $6 billion in market capitalization to trade at the same P/E multiple as ATVI.
ATVI Secures Advantages Beyond Valuation
All things considered, KING has been criticized since its IPO for relying so much on the performance of Candy Crush Saga to drive operating performance. Likewise, ATVI is driven by a few titles that include Call of Duty and World of Warcraft. These titles have been long-lasting blockbusters, but like King Digital, ATVI is often criticized for not developing new hit series.
King actually helps ATVI in this area, because contrary to popular belief, King Digital has been incredibly successful outside of Candy Crush Saga. Prior to King Digital’s IPO, 80% of its bookings came from Candy Crush Saga. In its most recent quarter, only 39% of its bookings came from that title, and titles excluding Candy Crush Saga grew 30% year-over-year.
In fact, King Digital has five different titles in ThinkGaming.com’s list of 50 top grossing iOS and Google Play games. That’s more than any other developer, and with King Digital having just 13 titles to its name, the company has an extremely high conversion rate for top games.
The bottom line is that King Digital helps ATVI better penetrate the mobile gaming space, while also adding a company that knows how to develop a top-selling game.
Just recently, mobile devices surpassed PCs and gaming consoles as the most popular gaming platform for children ages 2 to 17. This shows that gaming has become increasingly mobile, and no company has consistently performed well in this arena as King Digital.
Given that the mobile gaming industry is expected to top $40 billion over the next couple years, King Digital could very well be a game-changing acquisition for ATVI. Not only is ATVI getting King Digital at a cheap price, but its expertise in mobile gaming and successful game development should continue to drive Activision stock much higher long-term.
As of this writing, Brian Nichols was long KING.
