99 Problems but a Profit Ain’t One — Companies are generally supposed to make money, as much as they can. At least, that was the prevailing wisdom for hundreds of years before the turn of the millennium when suddenly being unprofitable became cool (looking at you, Bezos). Now, however, the tables may have turned once again as those firms who are not making a profit are instead taking a punishment.
That punishment is coming in the form of stock price returns. According to a WSJ analysis, unprofitable companies listed on the Nasdaq have sold off an average of 25% just between September 30th and this past Friday. Meanwhile, profitable Nasdaq names are up a tad, returning an average of 1.4%.
Who else could you blame but the Fed. As JPow and the gang have hinted relentlessly at rate hikes, investors have started dumping assets that don’t actually make any money in favor of those that do. Yield starved investors no longer have to sell their soul to money-losing dumpster fires in order to get an above-market return. Instead, dividend yields are reliable earnings are becoming cool again. And the returns don’t lie. Taking a step back, we can see that the S&P and broader indices have beat up on high-tech/growth names in recent months with the Nasdaq’s Internet Index losing 16% since the end of September while the Nasdaq Composite is up 3.1% and the S&P returned 8.2% over the same period.
For those of you who just started investing during the pandemic, this is gonna be a big change. Non-zero rates are a big change. I understand, however, that it’s hard to believe the man who once said “f*ck your puts” is now saying “raise those rates.”
Play CoD in Excel — You can’t (yet), but what you can do is take a look at the first truly enormous acquisition of 2022. Yesterday morning, reports announced that Microsoft will be acquiring video game production and holding company Activision Blizzard for a grand total of $68.7bn ($95/sh) in an all-cash deal. Wow, and to think Take-Two really thought they were hot sh*t dropping only a measly $13bn on Zynga.
I know, I couldn’t believe it either. I’m not sure what’s more surprising, the acquisition itself or the fact that Microsoft doesn’t need debt financing to drop almost $70bn. In fact, Microsoft investors have been waiting for a massive acquisition or some other event to start unloading the over $130bn cash pile the firm has carried for several years. While having some cash is far better than no cash, too much cash isn’t exactly the savior as inflation eats away at its purchasing power and drags on returns. Luckily for Microsoft, recent controversies at Activision Blizzard hammered the firm’s value, so even the premium they’re paying could be seen as a discount.
So Microsoft investors, whether they hate it or love it, can at least be pleased that about half of the company’s cash balance is being put to work in a productive asset. And boy does that productive asset fit in Microsoft’s wheelhouse! CEO Satya Nadella and the team have been leaning hard into gaming for years, completing the purchase of ZeniMax Media (Bethesda) in late 2020 and a slew of other gaming studio acquisitions in the years prior. This one, however, just happens to be a lot bigger.
Furthermore, you may have heard of a little thing called the metaverse. Sure, Zuckerberg has tried to make the digital universe(s) his own poster child, but many experts believe gaming will be the first unlock the metaverse has to offer. With the purchase of Activision Blizzard, who makes/owns games even we non-gamers have heard of including Call of Duty, World of Warcraft, Overwatch, CandyCrush, and many more, Microsoft becomes the world’s third-largest video game company behind only Tencent and Sony. Sounds like a good start to me.
This is a wild one and a great way to kick off big dog M&A activity for the year. Stay tuned to find out when Excel gets a CoD function.
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