Motley Fool Hidden Gems Investing - Microsoft Buys Activision Blizzard and Takes Aim at Meta Platforms

Episode Date: January 18, 2022

With its biggest acquisition ever, Microsoft buys Activision Blizzard for $68.7 billion. Jason Moser analyzes why the move signals a direct shot at Meta Platforms and why Microsoft shareholders should be optimistic about the company's gaming aspirations. He also examines shares of Goldman Sachs and The Gap, both falling similar amounts, and why one of them represents a potential buying opportunity. Plus, Alison Southwick and Robert Brokamp discuss actionable ways to stay on track with your financial goals for 2022, including a rare triple-tax advantage to help prepare for future healthcare costs. Stocks: MSFT, ATVI, META, NVDA, GPS, GS Host: Chris Hill Guests: Jason Moser, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Today on Motley Fool Money, Microsoft's biggest acquisition ever makes it clear the company is gearing up in the battle for metaverse supremacy. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. We've also got the latest on retail, financials, and the team from Motley Fool Answers is going to help you keep your New Year's resolutions on track. But let's start with Microsoft's biggest acquisition ever. The software giant is buying Activision Blizzard for $68.7 billion in cash.

The deal is expected to close in 2023, at which point Microsoft will become the third largest gaming company by revenue. There are a few things to get to here, Jason, but first and foremost, this seems like a shot across the bow at Meta Platforms. Jason Moser. Oh, it's a shot, Chris. It's a big shot. Yeah, this is an attention getter for sure. The year is just underway, and here we go, largest acquisition in Microsoft's history. Frankly, I do get the allure. I think there is plenty of potential for this to work given the market opportunity in gaming. We heard Nvidia recently here at CES 2022, they called it out as a $300 billion all-in market. You got 3 billion people around the world actively playing games today. Microsoft quoted in the call,

they expect this number to reach 4.5 billion by 2030. I think the neat thing about this deal, it really is something that plays into a strength of Microsoft's. This is a very complementary deal that doesn't really possess a lot of overlap. I think that's something important to consider. Obviously, Microsoft has a very big gaming business on its own. A lot of success there with Xbox, a lot of success with Game Pass, now crossing 25 million subscribers. For Microsoft management, they see this deal. Ultimately, it gives them that entryway into more gaming that's going to span all platforms, so mobile, PC, console, and cloud. Of course, Chris, they had to throw the M word in there. That's right, the metaverse. This is going to provide the building

blocks for that metaverse. But I think honestly, as wide-reaching as this deal is, I think it's compelling from a mobile perspective. I think this is honestly, this may be the biggest mobile opportunity for Microsoft to date, given its shortcomings to this point in regard to the hardware. They never were able to really make the phone thing work. This is going to give them a massive opportunity in mobile, which I think is something we shouldn't overlook. Before we focus on Microsoft for a second here, when you zoom out and look at the gaming industry and some of the stats you just provided. Is gaming now one of those industries that investors who have a portfolio of 20-30 stocks, do investors need to look at their portfolios and ask,

where is the gaming in my portfolio? Because it seems like if the industry is not there, if it is not in the must-have category, it's getting there pretty quickly, isn't it? I feel like we've had this conversation before in regard to travel. I think it absolutely makes sense for investors to look at their portfolio and say, well, how am I getting that gaming exposure? You look at Activision Blizzard. Activision Blizzard, it's a popular holding through the years with a lot of our listeners and subscribers. Obviously, a company that has witnessed some turmoil here lately that we can get into if we need. Ultimately, I feel like you've got Activision Blizzard coming at this with 400 million players of all of their games and

platforms across the globe. You've got Microsoft here just reporting that their gaming revenue just exceeded $15 billion for the year last year, grew 33% as they saw record engagement with nearly 33 billion hours played across their Xbox platform, that Game Pass platform. Everything that they've got combined there, to me, it absolutely makes a lot of sense for investors to look and see how they're getting that exposure because it really feels like, again, given where management sees this going, it really does feel like a market opportunity, even though it's really big today, feels like a market opportunity still with a lot of growth to be had. Let's talk about the turmoil for a second, because The Wall Street Journal had a story

on Sunday about how Activision Blizzard over the past six months has fired nearly 40 employees, disciplined another 40 on top of that to address the charges inside the company of misconduct, sexual harassment. Bobby Kotick, the CEO, was on CNBC this morning along with Phil Spencer, who's the head of gaming at Microsoft. Kotick got the question, the correct and obvious question, is this deal at this time with Microsoft due in part to what's been going on, the allegations at your company about sexual harassment, problems with the culture, and Kotick gave the answer that I thought he would give, which is essentially, no, it has nothing to do with that, and we're working harder. But I don't know, Jason, I guess the polite way to put it is, I just don't believe

him, because I think if shares of Activision Blizzard aren't cut in half over the past 12 months, Bobby Kotick is not as receptive to a conversation about his company being acquired. I think you're probably right. The numbers don't really paint the picture of a company that's been killing it over the last few years. The stock up 38% over the last three years. The market has doubled that output. $95 per share, all cash. That puts the business at 28 times trailing earnings around 25 times trailing free cash flow. When you look at Activision Blizzard's growth over the last three years during that same stock performance, you've got 8% annualized revenue growth over the last three years. That revenue growth has been lumpy at times. I think part of

that really does have to do with cultural issues that really came to a head here over the last over the last year plus. I'm with you. That's the answer I would expect Mr. Kotick to give. Now, by the same token, I feel like it puts Activision Blizzard in a little bit of a defensive position. I'm sure they look at this acquisition from Microsoft and they think, wow, this is pretty good timing. This gets us off the radar. Maybe we can get back to focusing on the business at hand. I think the really neat thing when you combine Microsoft together with Activision Blizzard. Microsoft, I think probably most people know of their gaming business just via the Xbox brand, which is fair. It's also worth remembering though, that Xbox, that hardware

really serves as the razor and that razor and blade model. They sell that Xbox essentially to just break even. I think technically, really, they sell it at a loss. But it's simply meant to get that device in people's homes so that they continue to pay for that subscription to those Microsoft gaming services. This really builds up that portfolio of services now that they can bring Activision Blizzard and all of those properties under their umbrella. That's really fascinating if you think about it. Again, going back to that mobile opportunity, this expands that opportunity tremendously because now it's not just the Xbox, it's the Razor, but given the mobile opportunity, it's the smartphone that's in

in everyone's pockets that represents the opportunity as well. I think you couple that together with the fact that Activision Blizzard, they're in a bit of a defensive posture today. I have to believe that Mr. Kotick thought, yeah, this is just the perfect time, let's do this. Now the question really remains is, what is Bobby Kotick's role with this business going forward? Because yes, the headline says he'll remain the CEO of Activision Blizzard, you read down into the actual report there and you realize that he's going to be reporting to Mr. Spencer, the CEO of Microsoft Gaming. That begs the question, are Mr. Kotick's days at Microsoft numbered? I tend to believe yes. I mean, who knows? But regardless, I think this takes

Activision out of the spotlight that they didn't really want to be in. Last thing before we move on, you got to tip your hat to the way Microsoft execute acquisitions. They're pretty opportunistic. You think about when they bought LinkedIn back in 2016 after LinkedIn had took a hit. Look, I remember we talked about that acquisition at the time and we were all looking at each other like, what are they going to do with LinkedIn? It's not a question of the money, they have the money, they can buy whatever they want, and they were able to make that work. If they can make LinkedIn work, you got to feel good if you're a Microsoft shareholder. You couldn't have said that. That was

very diplomatically put, Chris. I agree with you because, man, I'll tell you, every time I check LinkedIn out, I wonder immediately, why did I just check LinkedIn out? It, to me, it's not a very good experience. I don't understand how it hasn't really gotten better over these years. But the fact of the matter is that Microsoft has made that work. It is a moneymaker for that business. I think that really points to the power of the network. When you consider that network, when you consider the market opportunity in gaming, when you consider the fact that Microsoft apparently can spin gold out of virtually anything these days with Mr. Nadella leading the way, you got to like their chances with this deal.

Shares of The Gap down 7% this morning after the apparel retailer got a downgrade from one Wall Street analyst. The report outlined expectations that margins for The Gap are going to get worse, which, I mean, just ponder that for a second. I don't know what you do with the gap here. I really don't. I'm sure there are some investors looking at this saying, hey, look, this is a solid brand, and it is. They got Banana Republic, they have Athleta. There's value there and you can buy it at a discount. But this seems like like one of those times where don't buy on the dip. Just don't buy on the dip. There are too many question marks. They're still in the process of closing hundreds of stores as part of that

announcement they made back in 2020. Yeah, I think you're right. I think if you're looking for a company that can handle inflationary times, but exercising pricing power, Chris, I'm going to tell you to keep looking because the gap ain't it. And I don't think that's going to be something they're going to be able to handle here over the coming quarters either. I think we're going to continue to hear this discussion of inflation and how it's impacting the consumer in myriad ways when it comes to fashion retail, a notoriously difficult market in the easiest of times. This is not the easiest of times. I think that when you look at something like it, yes, you're right, they've got some tremendous brands under their umbrella. You've got Gap, you've got

Old Navy, Banana Republic, Athleta. There are a lot of different ways for them to win, but I do agree. I think it is a business that is beholden to promotions and discounts. It is a business that is beholden to input costs, particularly on the cotton side, which I don't know how often investors really think about that stuff. But it took me back to 2012, I think, when we were doing a real money initiative here at The Motley Fool, where we were, as analysts, were able to run our own real money portfolios that were public-facing. I'd recommended Gap as a value investment. My argument was that there was a ton of pessimism because they had locked in these higher cotton prices and those were flowing through the financials really impacting

margins, but that at some point that would run off and profitability would come back. That worked. I sold for a modest gain. It was a fun value investment to make because it worked. Value investing is difficult because you've got to get it right on both sides. You've got to buy at the right price and sell at the right price. I don't know that I would look at Gap as a value trap. I do think it's strong enough of a business where there probably is a value thesis there, but I agree with you, I don't think we're there yet. I would be very, very cautious with this one. Nick Sciple. Fourth quarter revenue for Goldman Sachs came in higher than expected. Investment banking revenue was up 45% year-over-year, but shares of Goldman Sachs

down 8% this morning. What's going on here? Was it that bad? I get that even with the drop today, shares of Goldman Sachs are up around 20% over the past 12 months, but this seems like a stronger reaction than I would have expected for what is on the surface a mixed quarter. Probably. You know how the knee-jerk reactions of Wall Street are though. When you miss expectations, those questions come up. Remember Goldman too, it's a little bit different than the banks we were talking about last week and Wells and Citi and JPMorgan because Goldman is very much more an investment bank as opposed to a bank that necessarily benefits from the consumer like a Wells or a JPMorgan would. I think on the whole, it was not a bad quarter.

Net revenue for the quarter, $12.6 billion. That was up 8% from a year ago, so not lighting the world on fire. It looked like investment banking revenue, like you noted, was the star. that revenue $3.8 billion, you saw investment banking 45% higher than a year ago. But again, because they are tied to that asset management, wealth management, it can make performance a little bit lumpy. I think also you're looking at a bank here that is going to be a bit more exposed to the cost of talent. If you remember a theme late last week when we were talking about those other banks. Jamie Dimon noted this in JP Morgan's results that they were paying up for talent. Wage inflation was real. Incentives had to be ramped up in order to get the best talent.

Andy, you could argue that given the nature of Goldman's business, they probably are a little bit more exposed to this, probably have to pay a little bit more for talent because of the nature of the job at investment banking, and that really played out on operating expenses for the business, they were 23% higher than a year ago. But they grew book value 20%, better than 20% now. It stands at $284, just a little over $284 per share. That prices the stock around 1.2 times book value today. For a business that has returned close to 90% over the last three years, it feels like this could be a decent window of opportunity for people who are interested in a business like this. Basically, it's the opposite of the gap. Both stocks down around 7%, 8%,

but one of them looks like a buying opportunity. Yeah. I'm going to let you guess which one, but I have a feeling our listeners have been paying attention. Speaking of banks, before I let you go, you are coming back on Thursday with your long-time partner in crime, Matt Frankel. What are you guys going to be talking about? Yeah. Looking forward to a little reunion there of sorts. We're going to be talking about a company in the financial space that IPO-ed less than two years ago. To say it fits in that fintech category, I'd say is an apt description. We'll enjoy digging a little more into that particular business that is to be named later. We know it, but we're not going to tell

you until the show, Chris. But hopefully, we'll be able to dig into it a little bit more in the understanding of the potential opportunity for investors. Sounds good. Jason Moser, thanks for being here. Thank you. It's mid-January, so how are those New Year's resolutions going? You know the goals you set to get in shape and do better with money. With some actionable ways to help you stay on track, here's Robert Brokamp and Alison Southwick. The connection between health and wealth goes beyond rhyming.

Good health helps you build wealth, and wealth, in turn, can help you stay healthy. It's a well-documented but often overlooked virtuous circle that we hope will motivate you to think twice about taking care of yourself in 2022. After all, it's still January, and visions of resolutions are likely dancing still in your head. And survey after survey, year after year, shows that the most popular resolutions focus on waistlines or bottom lines. So if you're hoping to get into better physical or fiscal shape in 2022, we have good news for you.

Improving one might lead to improvements in the other. So consider the findings of a report from the Urban Institute entitled, How Are Income and Wealth Linked to Health and Longevity? The report concludes that as annual household income increases, the percentage of adults suffering from various health impairments decreases. So we're talking heart disease, stroke, arthritis, hearing trouble, vision trouble, you name it. The higher a household's income, the lower the incidence of these chronic diseases. And here's more proof.

A 2018 Washington Post article by Christopher Ingraham looked at federal guidelines for exercise, which are that adults should perform at least 150 minutes of moderate physical activity or 75 minutes of vigorous physical activity each week. And they should also do some muscle strengthening activity like calisthenics or lifting weights at least twice a week. And what he found was the states with the lowest percentage of adults who met that criteria also tended to have lower median incomes, with the lowest being Mississippi. And states with the higher percentages of adults who exercise had higher median incomes,

with the highest being Colorado. So does wealth beget health, or does health beget wealth? The chicken or the egg? Well, the answer is yes. Health can chip into your wealth or full-on decimate it, and wealth can lead to improved health. Both impact the other in multiple and not always so obvious ways. Yeah. So here are just three of the many ways that eating an apple a day can keep the debt

collector away or something like that. So number one, people who are healthier are more productive and people who experience health problems are more likely to miss work, be stressed, or succumb to something called presenteeism. So basically you're working, but you're just not on top of your game. Number two, health problems can get expensive. And the more money you're spending on copays and drugs and artificial whatevers, the less money you have to save and invest. Number three, one of the biggest reasons that people retire earlier than planned is poor health. People who retire earlier than planned have fewer years to contribute to their 401ks, smaller Social Security benefits, and their nest eggs must be spread over a

longer period. Okay. Bad health can impact your wealth, but how does wealth impact your health? Well, there are many ways here, too, but I'll just point out four. Number one, wealthier people are more likely to have jobs with higher quality health insurance, paid sick leave, and employer-provided wellness programs. They're also more able to pay for health interventions and less likely to put off medical services due to financial concerns. Number two, wealthier people are more likely to be able to afford gym memberships, personal trainers, healthier food, and other products and services that are associated with better health. Number three, financial difficulties cause stress, and stress

can in turn affect your health. Obviously, the more money you have, the less likely you'll experience money-related problems. Number four, higher-paying occupations tend to rely more on brain than brawn, thus resulting in less bodily wear and tear. The most physically demanding jobs, things like construction, landscaping, factory work, they generally pay average or below-average incomes. The equation for building wealth is somewhat straightforward. Earn good money, spend wisely, invest the rest for the long term. Maintaining good health is more complicated. I mean, after all, even a marathon runner can get cancer, but that's no excuse to avoid exercise and eat right. According to the Boston Foundation and the New England Healthcare Institute,

you can blame or thank genetics for about 20% of your state of health. Half is the result of your behaviors. Yeah, we do have some control over our health. A 2015 study published by the journal Progress in Cardiovascular Diseases, always a fun read, found that more than 11% of healthcare costs are due to inactivity alone. But even the rich, famous, and physically awesome get sick. So, regardless of your health or wealth, you must still be prepared for any kind of medical setback and the costs they incur. So, that starts with that boring old advice of having an emergency fund and taking advantage

of a health savings account if you're eligible for one. HSAs are the only accounts with triple the tax advantages. Contributions are pre-tax, growth is tax-deferred, and withdrawals are tax-free if used for qualified medical expenses. It's also crucial to be sufficiently insured. Definitely health insurance, definitely life insurance if you have kids, maybe disability insurance. If you're still working, those may be provided by your employer. I'm sort of an ad hoc member of the benefits team here at The Motley Fool, and I could tell you that there are definitely ways to utilize your insurance and benefits in ways that result in lower out-of-pocket medical expenses. So, definitely take some time

to learn about your coverage and other benefits. And finally, I'll just mention the old adage that it's never too late to work on your wealth or your health. A Canadian study published in 2010 found that people over the age of 65 who are physically inactive incurred $1,214 more in healthcare costs each year. So, let's get a little bit more practical here, Allison. What has been most helpful for you in the past getting healthier? Any helpful hacks you'd like to share? I don't know if it's necessarily a helpful hack, but honestly, working from home has been the best thing for me because I have to remove all barriers to exercise in order to do it. I now wear a business mullet every day. I'm somewhat professional on top, but with sweats or black leggings on the

bottom. I also use the Peloton app, but I use it with a bike that I got from the office. It's actually pretty cheap every month to do their app if you don't have a bike. And I got weights in the basement. So I can ride the bike whenever. I have 45 minutes in my day. And so now I'm working out every day and probably the fittest I've ever been. What about you, bro? Well, last week, I mentioned a great productivity book called Take Back Your Life by Sally McGee. And her research found that if you put something on your calendar, you're 75% more likely to do it. So every day on my calendar at 9, 11, and 1, I get a pop-up that reminds me just to do a little bit of exercise. And within that reminder, I have more than 20 different exercises I could choose from. And just the

stuff you would expect, right? Push-ups, sit-ups, wall sits, jump rope, burpees, mountain climbers, bear crawls, lightweights, whatever. I choose whatever I feel like doing for 5 to 15 minutes. Now, every time that pops up, I don't always do it, especially if I'm under deadline or something. But having that pop up every day definitely has increased the amount of movement in various exercises that I do. Also, in the past, I've used accountability websites like dietbet.com and stick.com that stick with 2Ks. Basically, you put money on the line to meet your goals. You essentially give them money, and you lose it if you don't meet your goal. If you do, you get your money back and maybe some of the money other people lost. That has

definitely helped me stick to various exercise and weight goals that I've had in the past. Yeah. Whether you need help tracking what you're eating or something to nudge you to exercise, there's probably an app out there for you that probably also has a free trial, so rather than having to plunk down all that money in the beginning. Well, to close, my mom, a hospice nurse, once tried to cheer up a patient. She said, you're surrounded by so many friends and family that care about you. Isn't that wonderful? And the patient replied, I'd rather have my health. And while that sounds grim, it's actually a popular opinion. A healthier retirement is a happier retirement, at least according to a survey by Age Wave and Merrill Lynch. When retirees were

asked about the most important ingredients for a satisfying retirement, 81% said having good health, while 58% said being financially secure, and only 36% said having loving family and friends. I mean, let's face it, you might as well just get a dog. They're way better. So health, wealth, and happiness are inextricable. Take care of your health in the coming year, and wealth and happiness are more likely to follow. That's all for today, but coming up tomorrow, a closer look at one of the dominant businesses in the great outdoors, Vail Resorts. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or

against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. you