For a company of the size of Activision Blizzard (ATVI) — which has a market cap of roughly $27 billion — the $46 million acquisition of Major League Gaming (MLG) seems like a waste of time.
But when you dig deeper, there is a compelling rationale. If anything, the deal may be a sign that ATVI stock has much more room on the upside.
OK, let’s first get some background: Founded in 2002, MLG is the pioneer of the eSports segment. This involves top-notch gamers who compete in tournaments that are watched by large audiences — both online and even in arenas (MLG holds one in New York and another in Columbus, Ohio).
To pull this off, MLG has built sophisticated streaming systems, chat capabilities and other real-time technologies. But the company has also assembled a team of expert content creators. As of now, the MLG network has more than 20 million monthly viewers.
In the eSports world, the gamers can become celebrities, which means getting juicy salaries and prize winnings as well as sponsorships. And yes, now that MLG is backed by ATVI, these gamers may be even more interested in its tournaments because of the potential for more lucrative arrangements and broader exposure.
More Esports on TV in ATVI Stock’s Future?
In fact, it looks like the company has plans to broadcast events on cable television.
“There is an ever-widening popularity of video games as a mainstream form of entertainment – not just interactively, but passively as well,” said Stephen Nichols, who is the CEO of GameSalad. “Look no further than game-playing YouTube stars for supporting evidence of this trend. What this means for developers is that there will be more pressure to create competitive games worthy of capturing passive audiences.”
But there are other advantages for ATVI. After all, some of ATVI’s franchises, like Call of Duty, are at the heart of many tournaments. So with MLG, there is potential to gin up more revenue opportunities, such as with sales of new games, cross-promotions of the portfolio, advertising and digital purchases.
No doubt, all this should be very encouraging for shareholders in ATVI stock.
The ATVI Factor
Back in October, ATVI officially announced the formation of its eSports division. It will be led by Chairman Steve Bornstein, who was formerly the chief of Disney’s (DIS) ESPN unit and developer of the NFL Network.
The mission is certainly ambitious. According to ATVI CEO Bobby Kotick, it is to “create the ESPN of eSports.”
Now the competition is certainly getting intense. Already Alphabet’s (GOOG, GOOGL) YouTube and Amazon.com’s (AMZN) Twitch.tv have significant audiences in the eSports market. But there are also a variety of other mega operators jumping in, such as Time-Warner (TWX), Electronic Arts (EA) and Microsoft (MSFT).
Yet the fact is that the market opportunity should be large enough for multiple companies. According to research from SuperData, the eSports category is expected to generate $2 billion in revenues by 2018, with 240 million viewers.
Bottom Line on ATVI Stock
Now, when it comes to ATVI stock, the near-term catalyst may not be eSports and Major League Gaming but actually the acquisition of King Digital Entertainment (KING). The deal is a key play for mobile, which provides ATVI with top franchises like Candy Crush, Farm Heroes, Pet Rescue and Bubble Witch. In all, the network has a staggering 474 million monthly active users (in the third quarter) who play about 1.4 billion games per day.
Let’s face it, gaming is a critical part of smartphones — with the market estimated to jump from $36 billion in 2015 to $55 billion by 2019. These are the kinds of numbers that can move ATVI stock in a big way.
Oh, and the company got a dirt-cheap valuation on the King acquisition, which sold out for only 6.4 times the projected 2015 adjusted EBITDA.
So all in all, ATVI has a diverse platform that caters to the main platforms, such as the PC, gaming consoles, mobile and the emerging eSports market. There should also be strong synergies in terms of cross-promotions and leveraging of assets.
In other words, when Kotick says he is building the next-gen ESPN, he’s not blowing smoke.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.