Microsoft Corporation (NASDAQ:MSFT) announced this week that it paid $2.5 billion to acquire Swedish gaming company Mojang, maker of the popular Minecraft game. Analysts are starting to weigh in on that deal, and those at Morgan Stanley think it’s a smart way for the company to use its offshore cash.
Minecraft to strengthen Microsoft’s Xbox platform
Of course the one segment of Microsoft that will benefit the most from this acquisition is the Xbox business. In their report dated Sept. 15, 2014, analysts Keith Weiss and Melissa Gorham said not only will Minecraft strengthen that platform, but it will also “provide a broader entry into mobile computing across a younger base.”
Michael Mauboussin: Here’s what active managers can do
The debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More
The game has been downloaded 100 million times on the Xbox 360, and gamers have spent 2 billion hours playing it on the console just in the last two years. Those statistics alone make it a good addition to the company’s gaming studio, which also holds a number of other hits like Forza and Halo.
Microsoft stretches its ambitions
Also Minecraft is the top paid app on both Android and iOS, which gives Microsoft a foothold on the two top mobile platforms. Since 40% of the downloads are on mobile platforms, this is even more significant. The company plans to keep the popular game available on all current platforms, including PCs and the PlayStation.
As a result, the Morgan Stanley team thinks the acquisition is really more about Microsoft’s ambitions in mobile computing. Gaming is CEO Satya Nadella called gaming the “single biggest digital life category, measured both in time and money spent.”
They also note that by buying Mojang, Microsoft will be able to speed up the development of Minecraft for Windows Phone. It hasn’t been developed for the mobile platform yet because of how low of a share Windows Phone has in the mobile device market.
The analysts also suggest that Microsoft might also be able to offer exclusive content for the Xbox and / or Windows Phone, possibly drawing more consumers to its platforms.
A good investment for Microsoft
They say many investors might be disappointed because Microsoft invested in its consumer business rather than its more attractive enterprise businesses. However, they add that paying about five to six times NTM sales for an asset that’s very profitable and growing fast is a “smart use” of the company’s “low yielding offshore cash,” in their view.
The Morgan Stanley team notes that currently, Amazon.com, Inc. (NASDAQ:AMZN)’s Web Services hosts some of Mojang’s operations. However, they expect Microsoft to switch that hosting to its own Azure services gradually overtime.
The analysts add that there is a risk that gamers will abandon Minecraft because Microsoft is buying it. Nonetheless, they see this risk as being low because of the game’s large installed base, its stickiness, and Microsoft’s plan to keep supporting all current platforms.
Further, they don’t see much of an impact on Microsoft’s financials with the acquisition. The company said Mojang will hit breakeven for GAAP earnings per share in the 2015 fiscal year. As result, they estimate as being between 1 cent and 2 cents accretive on a non-GAAP basis to Microsoft’s earnings. The deal is expected to close late in 2014.
They maintained their Equal-weight rating on Microsoft Corporation.