Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Investment Strategist
Summary: Microsoft is set to become the third largest game maker in the world with its $69bn acquisition of Activision Blizzard. The move makes sense given its previous gaming acquisitions and the existing Xbox franchise. The CEO Nadella also hints that the acquisition is a longer term bet on the metaverse. Overall, we see the deal as a good strategic fit and Activision Blizzard's figures mean that it will not be a negative impact on Microsoft's cash flows. ASML has put out its FY22 revenue guidance indicating 20% growth against 18% expected highlighting the enormous underlying demand for semiconductors.
Is the Activision Blizzard acquisition a bet on the metaverse?
Microsoft’s $69bn acquisition of Activision Blizzard, best known for its Call of Duty franchise, dwarfs its second largest acquisition to date worth $26bn which it paid for LinkedIn back in 2016. The deal solidifies Microsoft’s commitment to gaming, it will become the third largest gaming company in the world, which started with Xbox and then the Minecraft acquisition before the game maker ZeniMax deal. Microsoft is the biggest player in enterprise software and this industry could slowly mature over time as the latest growth wave, sparked by cloud computing and infrastructure, and moving software such as Windows and Office to a subscription model, comes to an end.
Microsoft has always wanted to become more popular with the consumer hence its previous efforts on the browser, search engine, news sites (MSN), Xbox, email etc., but this market has always been dominated by other technology companies such as Facebook, Google, and Apple. Gaming seems to be the best path forward into the realm of consumers and other companies such as Apple, Netflix, and Google have recently moved in the that direction.
Activision Blizzard has been the better part of 2021 smothered in a bad culture scandal which has helped Microsoft come to the rescue through a lower valuation and with the opportunity to make a clean sheet. Activision Blizzard is a $9.1bn revenue business with a 42% EBITDA margin, so the business will not meaningfully impact Microsoft’s free cash flow generation which is a plus for Microsoft shareholders.
The following comment from CEO Satya Nadella, "Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms," suggests that this is much bigger than gaming. However, we remain sceptical of the metaverse although both Microsoft and Meta (former Facebook) seem to be serious about this challenge to create what they say is the next computing platform.
ASML shows insane supply and demand imbalance in semiconductors
ASML reported this morning Q4 revenue of €5bn vs est. €5.1bn, and Q1 revenue guidance actually beat expectations if one takes a €2bn order, which cannot be recognized in Q1, and spread it out over the coming quarters. But importantly the fiscal year 2022 revenue guidance is 20% growth vs consensus of 18%, and the company reiterates its 2025 guidance of 24-30bn and strong growth opportunities beyond 2025. Investors have reacted positive to the earnings release.
The CEO Peter Wennick said on Bloomberg TV that the current semiconductor demand is 40-50% higher than the current maximum capacity suggesting significant capital expenditures in the industry over the coming years. The CEO says that it will take 2-3 years for the supply and demand imbalance to be eliminated.
ASML was the first major technology firm to report Q4 earnings and the strong outlook has already lifted sentiment among other technology stocks in today’s session.