Microsoft’s acquisition of Activision into the Metasverse, expansion of cloud business with the right hand, A new growth engine?

2022-05-22 0 By

When it comes to Microsoft, it is known around the world through its Windows operating system and its flagship game console, Xbox.The company was an early and quick entrant into gaming and was the first to profit from its “game Pass” subscription model.With its recent acquisition of Activision, the company may be planning a foray into the metasverse.Whether it’s buying Activision Blizzard or planning to expand its cloud business, what variables will Microsoft bring to the table in the future?Microsoft’s acquisition of Activision has become a hot topic, creating a buzz around the company’s ambitions in the gaming market.The deal, which is expected to close in the second half of 2023, is not only Microsoft’s but also the gaming industry’s largest all-cash acquisition to date, with an enterprise value of about $69 billion, or $95 per share, dwarfinglinkedin’s previous largest acquisition (LinkedIn is worth about $26 billion).Clearly, in terms of relative size, the acquisition represents just 3.3 per cent of Microsoft’s $2.14tn market capitalisation.However, Microsoft is already a major player in gaming, and the addition of Activision creates synergies, provides greater operational efficiency and strategic competitive advantage, and helps to tap into the untapped metaverse market.The acquisition underscores the company’s ambitions to enter the gaming market.Since its launch in 2001, the Xbox has grown its share of the gaming market over the past two decades.In addition, the company has been aggressively expanding its gaming business since acquiring Minecraft creator Mojang in 2015.This was followed by the launch of Xbox Game Pass in 2017 and the acquisition of ZeniMax Media, parent company of Bethesda Game Studios, last year.Microsoft’s growing gaming ambitions (source: Statista.com) These investments account for a large portion of the nearly $180 billion video game industry, resulting in the company’s gaming segment accounting for nearly 11% of total revenue.Microsoft dominates the gaming network market, with a whopping 50% market share in the US, according to Statista.By comparison, Reuters reports that the tech giant’s global gaming market share after activision’s acquisition was 10.7 percent.Global video Game Market Value 2020-2025 (source: Statista.com) Microsoft’s Game Pass costs $10 or $15 per user per month for a subscription, and the company has over 25 million subscribers and an average annual revenue of $3.75 billion.In addition, mobile gaming is not one of Microsoft’s strengths, and Activision’s control of King/Candy Crush gives the company a strong entry point into the market.With the company’s latest acquisition, Microsoft’s market share and growing gaming revenue will grow rapidly with Activision’s additional 400 million-plus monthly active players.This will make Game Pass one of the most compelling and diverse game content matrices in the industry, further reinforcing the company’s strong moat.With Mesh and HoloLens 2, Microsoft’s Mesh will be released in the first half of 2022.Azure based software will allow people to connect via HoloLens 2, Mixed reality (MR) headsets, smartphones, tablets or PCS, and collaborate as holographic beings.Mesh will leverage Microsoft’s office-based customer base as it will be integrated with Office 365 and used as a virtual project shared space as an extension to Microsoft Teams.Over time, Microsoft plans to integrate Mesh into other applications and make Metaverse mainstream.Financial information related to Mesh is not yet available, so an accurate analysis could take a long time.Nonetheless, Mesh’s impact is expected to resonate across the industry.To quote Microsoft CEO Satya Nadella, “Gaming is the most dynamic and exciting category of all platform entertainment today, and will play a key role in the evolution of metasurverse platforms.”Microsoft plans to use Activision’s platform to penetrate the meta world, he said in a press release announcing the company’s acquisition.Given that the concept of a metaboundary is not clearly defined, the frontrunners, including Microsoft, will be the forerunners of the metauniverse.The direction and vision of the company is clear, as Satyanadella said in an interview with Bloomberg, “If you think of Halo as a game, it’s a meta-universe.Also, my world is a meta-universe, as is ‘Flight Sim’.They are, in a sense, 2D today, and the question is: can it now be brought to a fully 3D world?We plan to do that.”Not surprisingly, a partnership with Activision could do just that, since the company’s “World of Warcraft” role-playing game also includes an extensive virtual world in which users can take on avatars and buy virtual goods such as pets.Investors have praised the CEO for turning Microsoft into a cloud computing powerhouse since he took over in 2014.The Azure segment is now a core segment and saw strong growth in 2021 with a year-on-year growth rate of 32%.More than just a cloud service, Azure has also developed AI, BI and IoT platforms that are expected to drive growth in the coming years.Microsoft reported revenue of $51.7 billion and EARNINGS per share of $2.48 in the second quarter of 2022, again beating analyst expectations of $50.88 billion and $2.31, respectively, and up more than 20% year-over-year.Revenue from the company’s cloud computing division, which accounted for more than 35% of total revenue, was $18.3 billion, up 26% from a year earlier and outpacing overall revenue growth.In addition, Azure and other cloud services revenue grew nearly 46% in Q2 2022, 50% in Q1 2022, and 51% in Q4 202.This marks significant growth in the company’s cloud computing business.According to Gartner, the global cloud computing market is expected to grow by approximately 19.6 percent, from $332.2 billion in 2021 to $397.5 billion in 2022.McKinsey reports that the cloud computing market is expected to reach $1 trillion by 2030.This strongly supports the company’s growth and prospects for the next decade.Global Public Cloud Services End-user Spending forecast (source: Gartner.com) Microsoft Azure is second only to Amazon’s Amazon Web Services (AWS), with an 18% share of the global cloud computing market.However, some argue that these numbers do not really reflect objective reality, as Microsoft has many areas of cloud computing that are not covered by AWS, for example, its SQL division offers more services that are not taken into account by market share consensus.So just comparing where the two are going hand in hand doesn’t paint the complete picture.Ten years from now, the Azure division will be a major growth driver, with operating margins expected to improve slightly as it accounts for the majority of overall revenue.Wall Street analysts are bullish on the stock, with a consensus average price target of $372, up nearly 30%.The company’s cloud computing division has played a big role in the positive sentiment.Azure has outperformed Windows and is now on track to surpass Office as the company’s largest revenue generator in 2022, according to Piper Sandler analyst Brent Bracelin.Similarly, Bank of America analyst Brad Sills writes:”Driven by the combination of the Azure cloud infrastructure platform, continued adoption of the cloud-based Office 365 productivity suite, and more profitable gaming and game pass revenues in Xbox, Microsoft is well positioned to deliver sustained low double digit growth over the next 3-5 years.”In the wake of the pandemic, demand for cloud computing has grown rapidly.Microsoft already has a large customer base, including business customers who use its productivity software and data management solutions.As these customers migrate to the cloud, they are more willing to stick with the same provider rather than switch to a new one.Because Microsoft does not release its Azure data separately, but rather incorporates it into the entire “smart cloud,” it is difficult to predict the exact impact this might have on financial statements.However, sentiment remained positive.Conclusion Microsoft remains one of the most powerful players in the tech industry, offering a wide range of products in multiple areas.Positive growth will come from Microsoft’s intensive future initiatives, which revolve around the expanding gaming market, the upcoming metasomes, and the accelerating cloud computing market.While Microsoft Azure is the runner-up in cloud computing, impressive growth metrics in recent quarters highlight its serious threat to the market leader.What’s more, it remains to be seen how the recent Activision acquisition will play out in the long run, but there’s plenty to hope for.For more highlights, follow us Stock Research