Wedbush Securities Analyst Michael Pachter joins Yahoo Finance Live to discuss Activision Blizzard earnings, the Microsoft-Activision merger, slowing game engagement, and the outlook for the gaming industry.
BRIAN CHEUNG: "Call of Duty" maker Activision Blizzard posted a revenue beat for its latest quarter, but fell short on the bottom line as the industry faces a slowdown. Joining us to discuss is Wedbush managing director of equity research, Michael Pachter. Michael, great to have you on the program this morning. Again, the earnings hitting the tape. I guess no surprise that in the reopening of the economy, maybe fewer people are playing video games. But what do you see from the company's earnings report that tells you where you expect to see the stock go in the future.
MICHAEL PACHTER: You know, I actually think that people are playing games probably about the same level as a year ago, with the exception, perhaps, of children focused companies like Roblox. In fact we saw that Activision's King division, which is their mobile games, "Candy Crush," was up 6% year over year in the in-app purchase part of the business. And even more encouraging, their advertising part of that business is up over 20%. So, in fact, people are engaged.
In Activision's case, you know, they really benefited in the first half of 2021 from a great "Call of Duty" game that came out in the fall of 2020. And this past year, the "Call of Duty" game just wasn't as good. And at the same time, the company launched a free-to-play game called "Warzone," "Call of Duty, Warzone," that's kind of distracted people. So there's more people engaged, I think, than the numbers suggest. It's just that the company had difficult comparisons and suffered because of the record "Call of Duty" catalog sales a year ago.
AKIKO FUJITA: Yeah, Michael, good to talk to you again. Let's talk about your price target on this stock. $95 is what we're looking at. How much of this factors in this acquisition from Microsoft? Do you see that as a tailwind in the long-term once it gets approved or a headwind?
MICHAEL PACHTER: All of it incorporates the acquisition by Microsoft. And I can confidently say that Satya Nadella is not no Elon Musk. So he's not going to renege on the deal or look for a lower price. I can confidently state that the FTC has no legal basis to challenge this. They might try. And they actually surprised us on Friday when they sued to block Facebook's acquisition of a tiny little company called Within. So Lina Khan is showing she hates big tech.
But the basis for a challenge here would be that if Microsoft were to complete its acquisition of Activision, that they would pull games off of Sony's Playstation platform. And Microsoft has already blogged and tweeted we won't do that. We have contracts. We'll honor them. What the FTC will likely do and should do is seek an agreement with Microsoft and enter into a consent decree, not block the merger, not sue to block the merger.
And the consent decree will say, we're not going to raise game prices or the cost of the console. And we're absolutely going to continue to support Playstation with Activision games. If they get that, this deal sails through. So watch October because that's nine months after the deal. That's kind of when the FTC has to fish or cut bait.
And if they don't sue by the end of October, watch Microsoft announce that they're going to close the deal by year end. And then we'll see what the FTC does. But I think this deal closes. I think it closes no later than January 15. And I think the price is 95 bucks, hence my price target.
BRIAN CHEUNG: So just to kind of go back, I guess, then, to the business model, if it's smooth sailing with that acquisition there, what is the future strategy for this company that's really going to help them in the long run when you talk about the competitive landscape here? Because it seems to me that there's been this big shift to kind of the free-to-play model here.
You mentioned "Warzone." That's one of those games. "Fall Guys" an enormously popular game especially among kids, also among myself as well. But these are free games that you're not paying for, but the idea is, I guess, to get the revenue stream from the add-ons and the kind of customs that you can get in that game.
MICHAEL PACHTER: So Microsoft had a vision years ago that I thought was stupid, that they were going to come up with a subscription service, and everybody would pay them for the right to play games. And they just didn't have very many games.
Then they went on a buying spree, and they bought six independent studios, the biggest of which is Obsidian. They're very, very good. But then they bought Bethesda, which is a giant studio, and now they're buying Activision. When they're done, they are the fourth major game publisher in the US. So they're going to be giant, and they're going to be in a position to actually support their subscription.
Their future vision is, let's eliminate the console. Let's use the cloud, and let's deliver games to any screen that you have. And that potential market is 3 and 1/2 billion people. So I don't think they'll get that many subscribers, but will they go from 25 million to 100 million? Yes.
So much like Disney bought Fox to support Disney+, they didn't pull the Fox movies out of theaters. They're just putting the catalog eventually onto Disney+, instead of HBO. And that's a very, very smart strategy. So that's where this is headed, more free-to-play. Activision is great at free-to-play. More than half their revenues come from free-to-play. So it's a big, big opportunity for Microsoft to get good at it.
AKIKO FUJITA: Hey, Michael, really quickly, is that a painting of yourself in the back?
BRIAN CHEUNG: I was wondering the same thing.
MICHAEL PACHTER: It is. My good friend Steve Felix did this for my birthday. And so if you want a portrait, please let me know, and I'll get you Steve's contact info.
BRIAN CHEUNG: Yeah, well--
MICHAEL PACHTER: He does rock stars. He does rock stars almost exclusively, but he did me as a favor.
BRIAN CHEUNG: Well, I was-- yeah, I mean, Akiko and I want one of the two of us maybe in the backdrop. That way, we can have another--
MICHAEL PACHTER: I will be happy to put you in contact with Steve. He's awesome.
BRIAN CHEUNG: Have your people reach out to my people. Wedbush managing director of equity research, Michael Pachter, always a pleasure to have you on the program. Thanks so much.