Microsoft (NASDAQ:MSFT) stock is back in the spotlight on rumors that the company might be interested in buying Warner Bros. Interactive Entertainment — a video game division of AT&T (NYSE:T) — for $4 billion. With this rumor swirling around, many investors wonder if this buyout would strengthen the bullish case for MSFT stock.
Here’s why it could be a significant purchase for the trillion-dollar tech company moving forward.
As I’ve discussed in the past, there are plenty of reasons to be hyped about Microsoft. There are also some potential catalysts that are less promising. But the company’s prospects in the video game industry fit firmly under the “legitimately promising” category. This is especially true with the novel coronavirus amplifying the interest in gaming this year.
In fact, if you break down video game sales in just one week alone between March 16 and March 22 (when the pandemic started to affect the U.S. more broadly), sales increased 63% and like-for-like sales increased 44% “suggesting that many people were turning to video gaming to keep them entertained through the crisis.”
Zooming out, the success in the video game industry thus far has continued to drop analysts’ jaws, with video game sales nearly reaching $1 billion in May. That success came without hyper-popular releases like a new Grand Theft Auto game to help boost the year-to-date results, as it did in prior breakout years.
Gaming Still Matters for MSFT Stock Moving Forward
Although it’s possible that the impressive success in the gaming industry thus far could dissipate during the summer, things will undoubtedly heat up again in the holiday season. All of the major console producers — Microsoft, Sony (NYSE:SNE) and Nintendo (OTCMKTS:NTDOY) — plan to release next-generation consoles bolstered by numerous exclusive video game releases at the end of the year.
The potential success of Microsoft’s Xbox Series X console release is likely already baked into the price of MSFT stock. However, a potential buyout of “WB Games” would bolster the strength of its video game catalyst.
Of course, right now it’s speculative, but here’s why such a buyout could be a big deal. Microsoft could further distinguish its new Xbox console from Sony’s PlayStation 5 with more exclusive content through the WB Games deal. The strength of this deal would synergize well with the renewed surge in video game popularity and the inevitable consumer interest with the release of new gaming platforms this year and next.
All of these factors combine in a way that could put the new Xbox over the PlayStation 5 — its primary competition in the video game space. This, in turn, would bolster the strength of MSFT stock as a video game play.
A purchase of WB Games would give Microsoft the rights to big-name franchises like Mortal Kombat (Mortal Kombat 11 was the No. 5 top-selling game in May 2020), and possibly development rights to popular film- and comic-based franchises like Middle-Earth: Shadow of War and the Batman: Arkham series. With several more popular franchises added to its exclusive video game library, Microsoft would win over the hearts of even more gamers, right as the new console wars begin.
The Bottom Line on Microsoft
Right now, the buyout of WB Games by Microsoft is just a rumor. Many competitors in the video game space are also likely candidates for a deal, with Electronic Arts (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO) all rumored to be in the mix.
As such, it would be premature to make an investment in MSFT stock solely on the possibility of a buyout, especially at this early stage. However, if it does happen, expect the preexisting strengths in Microsoft’s gaming division to be amplified.
You should also expect its Xbox Series X console to have at least one significant advantage over the PlayStation 5.
Fortunately for thirsty investors who are inclined to make a bet on this rumor, there are numerous other reasons why Microsoft’s stock is a buy outside of video gaming alone. I won’t say it’s the best idea at this price point, but at least there’s plenty of cushion to fall back on for those who are more adventurous.
WB Games buyout or not, the long-term case for Microsoft continues to shine.
Robert Waldo has been a web editor for InvestorPlace since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.