While the market waits on regulatory approval of Microsoft’s (NASDAQ: MSFT) takeover, Activision Blizzard (NASDAQ: ATVI) is on the verge of releasing a flurry of new content that should drive results in Q3 and Q4. Benchmark noted the content and called it a “significant” second-half catalyst that should drive growth into 2023. Names on the roster include new releases in the Call of Duty, World of Warcraft, and Overwatch brands while a new Diablo release is slated for next year. 

Moffet Nathanson recently upgraded the stock citing a 20% discount to the Microsoft offer. They upped the stock to a Buy and raised the target to $95, in line with the analyst consensus. In their view, the deal with Microsoft should go through despite the regulatory hurdles and the discount to price is an “uncorrelated market opportunity” deserving an upgrade. Ultimately, the FTC has to decide if Microsoft’s acquisition will give them enough leverage to run rough-shod over competitors like Sony (NYSE: SONY), Nintendo (OTCMKTS: NTDOY), and even smaller players like Zynga (NASDAQ: ZNGA) and that scenario is unlikely. More likely, the deal will allow Microsoft to compete better within the industry and that is good for investors and gamers alike. 

Activision Blizzard's Upswing Has Already Begun 

Activision Blizzard did not report a robust 2nd quarter but it was good enough considering the multi-year downturn in the gaming industry. The company reported $1.64 billion in net revenue for a decline of nearly 15% over last year but it beat the Marketbeat.com consensus by nearly 450 basis points and sequential growth is present in all segments. On a segment basis, Activision and Blizzard both saw a YOY decline in revenue and earnings but sequential growth while the King segment grew both revenue and earnings from last year. 

The bad news is that margin compression exists as well and was more than enough to offset the top-line strength. The operating margins contracted to 21% GAAP and 28% on an adjusted basis to leave the adjusted EPS at $0.48 or down $0.43 from last year but there is a small offsetting factor. The adjusted EPS is ultimately in-line with the analyst's consensus and was supportive of price action in the pre-market hours. 

Turning to the outlook, the company did not give any formal guidance but did issue favorable commentary. The company is expecting YOY declines in the 3rd quarter but for sequential improvement to continue and extend into the 4th quarter. YOY earnings growth is expected to return in the 4th quarter. 

Activision Blizzard Is Growing A Dividend, Too 

Activision Blizzard is not a high-yield name with a distribution yield near 0.6% but it is a safe payout and growing at a robust rate. The company is paying out only 17% of its earnings and has a strong cash flow and balance sheet to back it up. The company carries some debt but is net cash to the tune of $7.1 billion and the cash pile is growing. Based on the history of increases, and assuming the MSFT deal doesn’t go through, Activision Blizzard should make another increase at the end of the fiscal year and it should be in the range of 15% if not higher. 

The Technical Outlook: Activision Hovers In Discount Territory 

Shares of ATVI popped in the wake of the Microsoft news but have yet to reach the deal price. The price action is hovering well below that level but is showing strong support so another pop in the action could come at any time. Until then, the risk lies with Microsoft. If the deal falls apart the market will most likely sell off before it begins to move higher again.