Activision Blizzard Gets Caught up with UK Regulators | A2 + Synlait pain | RBA – hikes ahead?

27 April 2023

Stock in Focus: Activision-Blizzard

Heads I win, tails I win 

Microsoft was dealt a blow in its long-running quest to buy Activision-Blizzard by the UK’s Competition and Markets Authority on Wednesday as the watchdog declared it wouldn’t approve the +$75B acquisition by the tech giant – its ostensible area of concern is cloud gaming, but the real pain point is the hugely popular Call of Duty franchise – Microsoft has already signalled its happy to license Call of Duty to other platforms (Sony’s Playstation etc) so this strikes us as a little disingenuous. Likely Microsoft will appeal but thinking broader-picture for a moment it’s worth asking the question – does either side need each other? 
Microsoft’s answer might be sure, yes; its sales last quarter in gaming declined 4% – a little help from Call of Duty never hurt anyone. Xbox hardware revenue dropped 30% and content sales grew +3% – it wasn’t a great quarter for gaming and an Activision acquisition would boost revenue. On the other hand, Activision had a great quarter – net bookings grew 25% and that Call of Duty Segment grew 28%. There’s a case to be made that Activision needed Microsoft last year – when it was scandal-ridden and a buyout offered a quick PR cleanup – and that Activision doesn’t need the company that Gates spawned now. It’s a heads I win, tails I win situation – an acquisition is a good bit of arbitrage, but as a stand-alone company is just fine. Worth noting that Buffett bought Activision prior to the acquisition talk as a stand-alone asset: arbitrage was just a bonus. We still retain buy on the company.


New Zealand

The New Zealand market (NZX50, -0.8%) was down yesterday Synlait (-27%) and A2 Milk (-5.5%) leading the losses. Rakon advanced +5% to $1.00 per share.

Synlait Milk shares slumped after reducing its net profit guidance for the 2023 financial year, expecting a -$5m loss to $5m profit; $20m lower due to further demand reduction for advanced nutrition (infant formula) and higher financing and supply chain costs.

A2 Milk 20% shareholding in Synlait was obviously hit; we downgrade A2 Milk from HOLD to Neutral and, ruling out strong growth means its valuation of ~26x fwd earnings is not justified in our opinion, while its large cash reserves (~$600m) and debt-free balance sheet have us “on the fence” and ruling out a downgrade to Sellan acquisition on the horizon? Gotta put all that cash to work somewhere.


Australia

The Australian markets (ASX200, -0.1%) edged lower on Wednesday.

Materials were the worst performing as iron ore prices continue to slide on weaker Chinese steel demand and rising inventory levels. This offset modest gains across the rest of the market following report inflation in Australia is starting to come down (down off its peak) lowering the probability of one more rate hike by the RBA next week.

Australia’s 2023 first quarter headline CPI (inflation) lifted +1.4% from the previous quarter ahead of market expectations of a +1.3% increase, although away from the peak with annual inflation moderating to +7.0% from +7.8% in the previous quarter. We still feel there is room for at least one more rate hike by the RBA over one of the next two meetings and then it will be a case of wait and see – and we rule out any cuts until 2024.


US

The S&P 500 declined 0.38% as earnings continue to roll in — it’s not the earnings decline “everyone” was predicting – quarter of a way through and aggregate revenue across the S&P has grown +5.9% and earnings have declined 1.2%. It’s not a boom-town, but it’s hardly recessionary either. We keep saying this but we’ll repeat it again: the consumer keeps spending.

Meta

We’re pretty adamant that “the metaverse” is a money-losing concept but credit where credit’s due – Meta increased ad impressions by 26% and the average cost of an ad declined 17% (i.e. 9% organic growth). This reverses the trend of the last few quarters where Meta’s impressions were growing pretty much in tandem with the decline in average ad price, meaning organic growth was practically 0%. Reality Labs (Metaverse) continues to be a massive money drain – revenue halved to $339M while its loss ballooned another billion or so (what’s a billion between friends?) to +$3.9B. To put it in context, jettisoning Reality Labs would’ve resulted in +$11B of net income rather than $7B. It’s good to see advertising turn around, but Reality Labs continues to be a black hole of a money sink. Note that Reality Labs is the culprit for a reduction in operating margin too – from 31% to 25%. 

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