This downed tech stock could burst
Ubisoft (UBSFY -1.40% ) is a France-based video game publisher that is responsible for successful game series like Assassin’s Creed, Ghost Recognition, Far cry, and rainbow six. Faced with a weakening of some of its major franchises, release delays and tough comparisons to times when pandemic-related social distancing and shelter-in-place conditions helped boost engagement, the company and its shares have admittedly underperformed lately. . After big pullbacks, Ubisoft stock looks pretty cheap at current prices because it has the resources to rebound and deliver big long-term gains.
But there is another reason why I load the stock. I almost never invest in a company with the expectation that it will be acquired, but Ubisoft’s takeover potential has been a big factor in my decision to buy more shares lately. Here’s why.
Lately consolidation is the name of the game
Consolidation has been a trend in the tech industry and the market as a whole for the past decade and it has accelerated in the past 15 or so months. Take a look at the table below to see trends in mergers and acquisitions (M&A):
M&A activity increased from 2010 to 2020 and then skyrocketed in 2021. Last year could also be seen as the starting point for the latest wave of acquisitions in the gaming industry, with electronic arts the acquisition of Glu Mobile at a 36% premium to the pre-deal share price and an enterprise value of $2.1 billion. Interactive Take-Two and Microsoft followed by massive acquisitions of gaming companies in early 2022, and the big trend of mergers and acquisitions in the industry is worth keeping in mind when evaluating Ubisoft.
Whether for investors or acquisition contenders, Ubisoft looks cheap
In the first three reported quarters of Ubisoft’s most recent fiscal year (which ended March 31), the company’s net bookings fell 16.6% and bookings through typically high-margin digital channels fell. by 12.6%. Factor in the delays of some long-in-development games and the loss of investor confidence in the company’s product portfolio, and it’s not hard to see why the stock is down around 45.5% over the past year. On the other hand, I think stocks look like a great buy at current prices.
After falling around 64.5% from its peak in 2018, Ubisoft now has a market capitalization of just $5.3 billion and trades at just 10.6 times the midpoint of the earnings target. the company’s adjusted operating profit for its recently ended fiscal year.
The company still has an impressive collection of game franchises and development and marketing resources, and its current level of valuation might make it too attractive as an acquisition for a larger player to pass up.
Microsoft’s $68.7 billion takeover ActivisionBlizzard was approximately 45% up from the publisher’s closing price on the previous market day. Meanwhile, Take-Two Interactive’s acquisition of Zynga represented a premium of 64% compared to its closing price on the day before the takeover announcement. It’s worth noting that Ubisoft’s stock has actually fallen 18% since Microsoft’s acquisition of Activision Blizzard was announced, and the games company’s recent acquisition prices support the hypothesis according to which Ubisoft is expected to trade at higher multiples.
With Microsoft taking over Activision Blizzard in order to augment its games-as-a-service and metaverse initiatives, it wouldn’t be surprising to see its console gaming rival sony make a game for Ubisoft to strengthen its own competitive position. However, it is also entirely possible that Microsoft itself will try to acquire the French publisher and other game industry players, including Take-Two Interactive, Electronic Arts, Tencentand nintendo also pose as potential suitors.
Even if Ubisoft is not acquired, I believe it can continue to generate strong returns for investors. Interactive entertainment is always poised for long-term growth, and just one new hit series can dramatically change the narrative surrounding a venture into the successful gaming industry. The stock looks like a steal at current prices, and the substantial likelihood that Ubisoft will be taken over at a premium creates even more reason to buy the stock now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.