Up 25% year to date, Microsoft (NASDAQ:MSFT) is a gift that keeps on giving this year. There are several hot reasons to invest in MSFT stock that have helped it succeed amid the novel coronavirus pandemic. But now one of those hot reasons — its prospects in gaming — is even hotter.
Specifically, a deal between Microsoft and ZeniMax Media announced on Sept. 21 gives investors a reason to rejoice.
Microsoft agreed to purchase ZeniMax for $7.5 billion. While that’s a hefty price tag, the potential benefit to its gaming division is huge. After all, ZeniMax is the parent company of Bethesda Softworks and other big studios like Id Software.
Bethesda Game Studios is the developer behind hardcore (and widely popular) video game franchises like The Elder Scrolls and Fallout (at least the modern versions). Bethesda is also the publisher behind other critically acclaimed franchises like Arkane Studios’ Dishonored franchise and Prey reboot, not to mention Tango Gameworks’ The Evil Within horror game franchise. (ZeniMax is the parent company for both Arkane and Tango.)
With Id Software under the ZeniMax mantle and Bethesda as its publisher, the new deal also includes the Doom, Quake and Wolfenstein franchises. All of these are household names in hardcore gaming circles. The games in these franchises essentially defined (and redefined) the first-person shooter genre over the years.
Simply put, this is a huge deal in the world of gaming. That could make it a huge deal for MSFT stock too, both in the short term and the long term.
A Stronger Case for MSFT Stock as a Video Game Play?
With the release of the Xbox Series X and Sony’s (NSYE:SNE) PlayStation 5 this holiday season, this news comes at an ideal time. The acquisition of ZeniMax could give Microsoft a significant edge over Sony as we head into the next generation console cycle. By bolstering its number of exclusive games, the deal ought to give plenty of gamers a reason to choose the new Xbox over the next-generation PlayStation.
Microsoft CEO Satya Nadella states that the new deal “metaphorically and literally double[s] … [its] gaming content capacity.”
But while all of these assessments seem true and there’s plenty of reason for hype, I think we ought to pump the breaks a little. This is great news for Microsoft and MSFT stock holders, but there are also some important nuances to consider.
Earlier this year I identified a key issue for why the Xbox Series X might struggle to impress gamers at launch. Specifically, it lacks true, exclusive next-gen content at launch. Most of the upcoming blockbuster titles for the Xbox Series X are available on the PC and old Xbox consoles.
Many gamers are still looking for reasons to upgrade, and true next-gen exclusives are the key driver of that incentive. On the surface, it looks like the ZeniMax buyout solves this problem. After all, it looks like Microsoft just nabbed a slew of exclusive franchises with critical acclaim.
But it isn’t quite that simple or glamorous.
Microsoft will still honor Sony’s prior deals with Bethesda. And future titles are not all guaranteed exclusives for Microsoft’s gaming products either. That will be determined “on a ‘case-by-case basis.’” This also doesn’t consider that any console “exclusive” titles from ZeniMax will likely make their way onto the PC regardless. This removes the true exclusivity that’s coveted by many prospective console buyers.
Ultimately, the buyout doesn’t solve the general struggle of next-generation consoles to promote truly exclusive experiences. Again, not as many gamers will see the need to upgrade right away unlike prior console generations.
But that could certainly change within a year or two.
The Bottom Line
Even with these more nuanced considerations in place, this is undoubtedly a huge win for Microsoft.
While it might not be enough to change the current outlook for its Xbox Series X debut, the release of new titles under any of ZeniMax’s premier studios should be a game-changer. If titles like the next Elder Scrolls game debut as an exclusive for the Xbox, then it should help change the tide in Microsoft’s favor (even if some gamers will still buy it on PC instead).
And even if this deal might not push a significant amount of gamers to buy its new console, Microsoft will still benefit from the sales of these games on competitors’ consoles. All of that makes the new deal look like a win-win for MSFT stock in the long run.
This is particularly true when you consider how it might also strengthen the library of its Netflix-like Gaming Pass streaming service. Reaching a bit farther into speculation, if it retains exclusive streaming rights to ZeniMax games, it could make its streaming service far more enticing than Sony’s offering.
All of these elements add up to make MSFT stock one of the more exciting video game plays today. This is especially true when you consider how the gaming industry has thrived (and will continue to thrive) in the “new normal.”
On the date of publication, Robert Waldo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Robert Waldo has been a web editor for InvestorPlace.com since 2016.