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Berkshire Bits: The Latest on Activision Blizzard, Paramount Global, and Occidental Petroleum
From an FTC lawsuit to falling stock prices, there's a lot going on...
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While the last week or two has been fairly quiet on the Berkshire Hathaway front, the same cannot be said for a few of the companies in its massive investment portfolio.
In particular: Activision Blizzard, Paramount Global, and Occidental Petroleum.
Lots happening at each. Some good, some bad.
Admittedly, of the three, only Oxy (at nearly 4%) can legitimately be considered a major holding for Berkshire. Activision (1.3%) and Paramount (0.5%) are tiny in comparison.
But I typically find it worthwhile to study all of Warren Buffett and co.’s capital allocation decisions — big or small. Each one reveals a little more of the Berkshire Hathaway story.
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Back in November, I wondered whether Berkshire Hathaway’s Activision Blizzard arbitrage play was in trouble.
And, as it turns out, the answer is a resounding yes.
Yesterday, the FTC filed an antitrust lawsuit to block Microsoft’s $68.7 billion acquisition of Activision. Granted, this doesn’t come as a complete surprise. Storm clouds had been gathering on the horizon for quite some time.
In fact, Berkshire mitigated some of its risk here by selling 8.2 million shares of ATVI 0.00%↑ during Q3, which reduced its stake in the video game maker to 7.7%. No word yet on whether or not that sell-off continued into the current quarter.
One thing is for sure: Microsoft is not going to take the FTC’s lawsuit lying down.
We continue to believe that this deal will expand competition and create more opportunities for gamers and game developers. We have been committed since day one to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC. While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court. (Brad Smith, president of Microsoft)
One of the concessions alluded to above was an unprecedented commitment from Microsoft to keep the coveted Call of Duty franchise on Sony PlayStation and other platforms for at least the next ten years.
Even with the FTC signaling a tougher M&A environment for Big Tech, this seems like an extremely bizarre hill for the government to fight on.
In terms of the console wars, Microsoft’s Xbox sits squarely in third place behind Nintendo and Sony — and acquiring Activision is unlikely to change that.
As I wrote last month:
All of the focus on Sony ignores the big elephant in the room: Nintendo.
The laser focus on how this move affects Sony oddly ignores the actual market leader in the video game space. The Nintendo Switch has done just fine without Call of Duty, routinely crushing both Sony and Microsoft in console and game sales over the past five years.
And Nintendo’s library of family-friendly games — unlike the more mature offerings on Xbox — doesn’t undermine Microsoft’s case. It strengthens it.
There are a million ways to succeed in the video game market and no single game, not even the great Call of Duty, can make or break a company’s competitive chances.
Not to mention the whole mobile gaming angle, too. Microsoft has no presence to speak of on either iOS or Android and a perennial hit like Candy Crush (owned by Activision) would give them a profitable foothold in this fast-growing and highly-lucrative area.
Despite Sony’s best efforts to muddy the waters, this acquisition is not all about Call of Duty and whether or not it becomes an Xbox exclusive. The Candy Crush series — and other mobile properties in the Activision content portfolio — are every bit as important.
Needless to say, I don’t see eye-to-eye with Lina Khan on this one.
It’s not easy to fight the government. If the FTC is really determined to block this deal, that’s probably what will end up happening.
But that doesn’t mean that it makes any sense.
This company can’t catch a break.
Long-time readers will know that I am in complete agreement with Warren Buffett (or Ted or Todd) on this one: PARA 0.00%↑ is a winner.
Now, someone just needs to tell that to Mr. Market.
In Q3, Berkshire bought 12.8 million more shares of the streamer — raising its overall stake to 15% of Paramount’s Class B (non-voting) stock — but the resulting “Buffett bounce” proved depressingly temporary.
This week alone, Paramount stock sunk from $20 to $18 — largely due to CEO Bob Bakish’s comments that Q4 advertising revenue will come in “a bit below” the previous quarter. Wall Street did not like that.
But, to me, that’s classic short-term-ism.
News of an advertising slowdown might panic a fund manager who needs to show a positive return in the next quarter or two, but it means almost nothing to a long-term investor. When your time horizon stretches ahead for decades, little bumps in the road like a cyclical downturn in advertising don’t mean much to the big picture.
In 2030 or 2035, does anyone doubt that digital advertising will be much bigger than it is today? Or that Paramount’s collection of entertainment assets — including CBS, Paramount Films, Showtime, Nickelodeon, etc. — will still be in demand?
I get it: One-time Paramount bulls are exhausted by the slipping stock price and wearily resigned to more pain ahead. Believe me, there’s a lot of negative sentiment out there surrounding this stock. (Which, in a way, makes me all the more bullish.)
Don’t just take my optimistic word for it, though. In the latest issue of Graham & Doddsville, the student newspaper of Columbia Business School, Christopher Bloomstran of Semper Augustus lays out a compelling case for Paramount.
Here are some of the highlights:
The Paramount movie studio, Showtime, CBS (particularly with CBS Sports) — those are trophy assets and you’re going to get paid for them. In my world, I’ve got revenues growing from today’s $28-29 billion to $33-34 billion.
I’ve got the margin doubling back up to where they were pre-pandemic, so 10-12%. You’re looking at $3-4 billion net income.
We have a market cap today that’s $12.5 billion. You capitalize that on $34 billion in revenues at a 10-12% margin, you can get to a $50 billion market cap, four times where you are today.
Investors hate it. Well, they hated Microsoft at 10x earnings after the stock fell 75% over six or seven years.
Wall Street is looking at the current quarter, they’re looking at the projection six months out. They’re not looking at where this is going to wind up.
[Paramount] is bringing on a lot of subscribers, but a lot of the value of those subscribers is back-end loaded.
Once Paramount has grown its streaming subscriber base to an appropriate level, those monthly subscription fees will start getting bumped higher and higher. And that means hundreds of millions of more dollars flowing into the coffers each month.
A lot of Paramount’s problems go away when the company decides to flip the switch from streaming growth to streaming profitability.
Investors just need to be patient enough to stick around for the pay-off.
Don’t look now, but OXY 0.00%↑ is back down to $63 per share — moving closer and closer to Berkshire Hathaway’s buy zone.
Remember: While Warren Buffett has mostly added to his Occidental Petroleum position at prices under $60, that’s not exactly a hard-and-fast rule. In late September, he purchased 1.2 million shares at $61.3765.
So, with Oxy rapidly approaching that level, I am officially putting myself back on Form 4 watch each evening after market close. No applause necessary.
What caused Oxy’s recent dip?
The Texas oiler missed earnings estimates in Q3, but still managed to post $2.5 billion in net income and used its $3.6 billion of free cash flow to continue repairing its battered balance sheet.
Of special note, Oxy repurchased 28.4 million of its own shares in the quarter. That boosted Berkshire’s stake in the company from 20.9% to 21.4% — without Warren Buffett even needing to spend a dime.
Earlier this month, I blasted Snowflake for diluting shareholders via stock-based compensation — so it’s nice to see Vicki Hollub and Occidental Petroleum charting a far more shareholder-friendly path.
Long may it continue.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.