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Is Activision Stock A Good Buy

Whether you should invest in ATVI should be based on your risk tolerance, experience in the markets, investing goals and view of the stock. Always conduct your own due diligence, looking at the technical and fundamental analysis, latest news and market commentary. Remember that past performance does not guarantee future returns, and never trade money you cannot afford to lose.

is activision stock a good buy

For a while, it seemed like a good idea to follow Buffett's lead, since Activision's shares consistently remained below $95. But as of this writing, its stock trades at roughly $75 and the deal faces a growing number of regulatory hurdles. China's antitrust regulators rejected Microsoft's initial request for approving the deal, European regulators launched a new probe, and the U.S. Federal Trade Commission sued Microsoft to block the acquisition.

Before Microsoft placed its bid for Activision Blizzard, the video game maker's stock had already declined nearly 30% over the previous 12 months. Like most of its industry peers, it faced a tough post-pandemic slowdown as people played fewer games and spent more time outside again.

As a result, analysts expect Activision's net bookings to rise 29% year over year in the fourth quarter and only decline 3% for the full year. Next year, they expect its net bookings and earnings to increase 19% and 29%, respectively, as those newer titles gain more momentum. We should take all those estimates with a grain of salt, since Activision stopped providing guidance after agreeing to be bought by Microsoft. But based on those forecasts, Activision Blizzard's stock looks reasonably valued at 20 times forward earnings and 6 times next year's net bookings.

This deal isn't dead yet, but I wouldn't buy Activision's stock simply because it might bounce back to $95 if the acquisition is approved. Its downside might be limited at these valuations, but the video game sector could remain out of favor for the foreseeable future. There are also plenty of more promising tech stocks to choose from in this bear market.

There's a lot of uncertainty with this deal, which is why the stock trades at such a massive discount to its buyout price. Buffett's company also understands this, which could be why it sold about 17% of its Activision stake in the third quarter. While completing this deal is still tricky, Microsoft hasn't thrown in the towel yet, showing its commitment to closing this transaction.

If the deal fails, you'll still own your Activision Blizzard stock, but expect some price drop immediately after the announcement as traders and others rush out of the stock. Additionally, at the stock's current valuation, its price-to-earnings ratio is near a four-year high and well above its average, further influencing a downward drop.

If you do think this deal will go through and aren't concerned with owning Activision Blizzard stock if it doesn't, there's one last implication to be discussed: taxes. If you purchase Activision's stock now and the deal closes within a year of purchase, you'll owe short-term capital gains on the investment, which taxes any gains at your tax bracket rate, not a long-term investment one. You'll still make a profit, but Uncle Sam will get a larger cut than if you held the stock for longer than a year.

Another potential concern is opportunity cost -- what your money could have been doing in the meantime. Plenty of other stocks of strong businesses were decimated in this bear market but are poised for a strong recovery. If these investments return greater than the Activision Blizzard arbitrage play, your money is better placed there.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard, Berkshire Hathaway, and Microsoft. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.

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