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Buy Atvi Stock

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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.

On Jan. 18, news broke that Microsoft (MSFT 1.50%) had agreed to acquire video game developer Activision Blizzard (ATVI 0.83%) in a cash deal valued at $68.7 billion. That's equal to $95 per share, which caused the stock price of Activision Blizzard to spike from the low $60s it was trading at.

With Activision now trading around $80 a share, there's a gap between where the stock is and Microsoft's agreed price to buy it. That's a potential arbitrage opportunity, offering a shot at buying the stock today and pocketing the roughly $15 difference per share once the acquisition closes. But is it that simple Here's what investors need to know.

Microsoft has agreed to pay $95 per share for Activision once the deal closes, so why isn't the stock at that price The gap in the share price reflects the uncertainty the market feels about the deal. In other words, the market is pricing in the chance that the acquisition doesn't close.

In the price chart below, you can see how the stock spiked in early January on the news of the deal. The stock had been selling off before that, primarily due to controversy around the company's management team and alleged misconduct in the workplace.

This is the question that investors ultimately need to answer for themselves. If the deal does close, buying the stock at $80 today gives you a potential 18.7% gain at the $95 per share acquisition price. If the deal falters, the downside is unknown because we cannot predict price action. But falling back to $64, its approximate price before the deal, would represent a potential downside of almost 25%.

If you're solely looking to play the acquisition as a trade, I'm not sure that the risk versus reward is worth it for most investors. The current sell-off among growth and technology stocks has many great stocks well off of their highs, and investors might be better off looking elsewhere to invest their money.

At current levels, Activision Blizzard has a forward P/E of 29.3X. This is above its industry average of 16.3X but Activision Blizzard is a proven leader in its space. Activision Blizzard stock also trades nicely below its decade high of 34X and not far above the median of 23.9X, with the rising earnings estimates also supporting its P/E valuation.

With every day that passes, Microsoft's (MSFT) takeover of gaming giant Ac

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