Microsoft (NASDAQ:MSFT) has had a very eventful start to 2022. Less than three weeks into 2022 came the announcement of a blockbuster deal — its biggest ever. A week later, the company reported its second quarter of fiscal year 2022 earnings. In turn, the company topped analyst projections for both revenue and earnings. Meanwhile, PC sales are on fire — which means more copies of Windows are being sold. Additionally, Microsoft’s Xbox Series X game console still sells out as soon as stores receive a shipment. Despite all this, though, MSFT stock is down about 11% so far year-to-date (YTD).
The last time we’ve seen such an extended pullback for MSFT stock was at the start of 2020. Shares went on a five-week skid starting in February of that year. By the time the market crashed in mid-March, Microsoft shareholders had seen their investment shed more than 25% of its value from its highs.
The current situation isn’t as bad, though, with MSFT stock off its November 2021 level by about 13%. There are plenty of reasons to be optimistic for MSFT stock in the long term, and I’m going to focus on just one: its acquisition of Activision Blizzard (NASDAQ:ATVI).
Activision Blizzard Acquisition Details
On Jan. 18, Microsoft announced the planned purchase of Activision Blizzard. The all-cash deal was valued at $68.7 billion. It is expected to close in 2023.
In turn, MSFT stock saw a very modest bump the day after the deal was announced.
What Does Microsoft Get From Buying Activision Blizzard?
Let’s face it: $68.7 billion is a huge acquisition. Prior to this deal, Microsoft’s previous largest purchase had been LinkedIn, when Microsoft paid $26.2 billion for the professional networking service in 2016.
However, Microsoft is getting a lot for its cash from Activision Blizzard.
The game company owns huge video game franchises including Call of Duty, Overwatch, World of Warcraft and Candy Crush. Its games are popular online, on PC, on game consoles and on smartphones. It counts 400 million monthly active players spread across 190 countries.
As I wrote a few weeks ago, Microsoft is playing the long game with this purchase. It will gain immediate revenue streams from sales of popular Activision Blizzard games like World of Warcraft and Call of Duty. However, Microsoft is betting the deal will also pay off with exclusives that drive more Xbox revenue. It also gives Microsoft a much stronger position in the metaverse. That’s a business already valued at nearly $22 billion in 2020 and projected to deliver a CAGR of 41.7% through 2030.
Therefore, that mobile game market is particularly interesting because it’s an area where Microsoft lacks much of a presence. Activision Blizzard says that just one of its smartphone titles — Call of Duty Mobile — brought in over $1 billion in consumer spending in 2021. That’s not chump change, it’s the kind of revenue that could move the needle for MSFT stock.
Moreover, it’s also an opportunity for Microsoft to gain a higher profile on smartphones in general. With no mobile operating system, Windows phones a distant (bad) memory and Cortana for iOS and Android shut down, Microsoft had been virtually locked out of the smartphone space. Thus, that’s a big market for a company of Microsoft’s stature to have been shut out of.
Bottom Line on MSFT Stock
Collectively, Microsoft’s acquisition of Activision Blizzard isn’t a sure thing. It could get derailed by regulators concerned about Microsoft’s growing power in the video game industry.
However, I think the deal is yet another strong reason to consider this Portfolio Grader “B” rated stock for your own portfolio. Add the Activision Blizzard deal — with all its likely upside — to other reasons to like MSFT stock. With its Azure cloud computing service, Office subscription revenue, Windows licensing, Xbox sales, Bing search revenue, Surface device revenue, the picture is pretty compelling.
So, it’s hard to say for certain which direction MSFT stock will go in the near future. There are too many macro variables like inflation in play. That being said, I think it’s safe to assume that even if this pullback continues for a while longer, the long-term trajectory for MSFT stock is a return to growth.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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