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This video was recorded on Jan. 18, 2022.
Motley Fool analyst Jason Moser talks about why the Microsoft-Activision Blizzard news signals a direct shot at Meta Platforms (FB 2.52%) and why Microsoft (MSFT 0.73%) shareholders should be optimistic about the company's gaming aspirations. He also examines shares of Goldman Sachs (GS 4.48%) and The Gap (GPS 1.78%), and why one of them represents a potential buying opportunity.
Plus, Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp discuss actionable ways to stay on track with your financial goals for 2022, including a rare triple-tax advantage to help prepare for future healthcare costs.
Chris Hill: Today on Motley Fool Money, Microsoft's biggest acquisition ever makes it clear the company is gearing up in the battle for metaverse supremacy. That and more coming up right now. I'm Chris Hill joined by Motley Fool's senior analyst, Jason Moser. Thanks for being here.
Jason Moser: Hey, thanks for having me.
Chris Hill: We've also got the latest on retail, financials, and the team from Motley Fool Answers is going to help you keep your New Year's resolutions on track. But let's start with Microsoft's biggest acquisition ever. The software giant is buying Activision Blizzard (ATVI +0.00%) for $68.7 billion in cash. The deal is expected to close in 2023, at which point, Microsoft will become the third largest gaming company by revenue. There are a few things to get to here, Jason, but first and foremost, this seems like a shot across the bow at Meta Platforms.
Jason Moser: It's a shot, Chris. It's a big shot. Yeah. This is an attention getter for sure. The year is just underway, and here we go, largest acquisition in Microsoft's history, and frankly, I do get the allure. I think there's plenty of potential for this to work given the market opportunity in gaming. We heard Nvidia recently here at CES 2022, they called it out as a $300 billion all-in market. You've got three billion people around the world actively playing games today, and Microsoft quoted in the call, they expect this number to reach 4.5 billion by 2030. So I think the neat thing about this deal, it really is something that plays into a strength of Microsoft's. This is a very complementary deal that doesn't really possess a lot of overlap. I think that's something important to consider because obviously, Microsoft has a very big gaming business on its own. A lot of success there with Xbox. A lot of success with Game Pass now crossing 25 million subscribers. For Microsoft management, they see this deal, ultimately, it gives them that entryway into more gaming that's going to span all platforms. So mobile PC, console, and Cloud, and, of course, Chris, they had to throw the M word in there. That's right, the metaverse. This is going to provide the building blocks for that metaverse. But I think, honestly, as wide reaching as this deal is, I think it's compelling from a mobile perspective. I think this is honestly, this may be the biggest mobile opportunity for Microsoft to-date, given its shortcomings to this point in regards to the hardware. They never were able to really make the phone thing work. This is going to give them a massive opportunity in mobile, which I think is something we shouldn't overlook.
Chris Hill: Before we focus on Microsoft for a second here, when you zoom out and look at the gaming industry and some of the stats you just provided, is gaming now one of those industries that investors who have a portfolio of 20-30 stocks, do investors need to look at their portfolios and ask, where is the gaming in my portfolio? Because it seems like if the industry is not there, if it is not in the must-have category, it's getting there pretty quickly, isn't it?
Jason Moser: Yeah. I feel like we've had this conversation before in regard to travel, and I think it absolutely makes sense for investors to look at their portfolio and say, well, how am I getting that gaming exposure? You look at Activision Blizzard. Activision Blizzard, it's a popular holding through the years with a lot of our listeners and subscribers. Obviously, a company that has witnessed some turmoil here lately that we can get into if we need. But ultimately, I feel like you've got Activision Blizzard coming at this with 400 million players of all of their games and platforms across the globe. You've got Microsoft here just reporting that their gaming revenue just exceeded $15 billion for the year. Last year, it grew 33 percent as they saw record engagement with nearly 33 billion hours played across their Xbox platform, that Game Pass platform. Everything that they've got combined there, to me, it absolutely makes a lot of sense for investors to look and see how they're getting that exposure because it really feels like, again, given where management sees this going, it really does feel like a market opportunity. Even though it's really big today, it feels like a market opportunity still with a lot of growth to be had.
Chris Hill: Let's talk about the turmoil for a second because The Wall Street Journal had a story on Sunday about how Activision Blizzard, over the past six months, has fired nearly 40 employees, disciplined another 40 on top of that to address the charges inside the company of misconduct, sexual harassment. Bobby Kotick, the CEO, was on CNBC this morning along with Phil Spencer, who is the Head of Gaming at Microsoft. Kotick got the question, the correct and obvious question, is this deal at this time with Microsoft do in part to what's been going on, the allegations at your company about sexual harassment, problems with the culture? Kotick gave the answer that I thought he would give, which is essentially, no, it has nothing to do with that, and we're working hard on that. But I don't know, Jason, I guess the polite way to put it is, I just don't believe him because I think if shares of Activision Blizzard aren't cut in half over the past 12 months, Bobby Kotick is not as receptive to a conversation about his company being acquired.
Jason Moser: I think you're probably right. The numbers don't really paint the picture of a company that's been killing it over the last few years. The stock up 38 percent over the last three years, the market has doubled that output, $95 per share all cash, that puts the business at 28 times trailing earnings, around 25 times trailing free cash flow. When you look at Activision Blizzard's growth over the last three years during that same stock performance, you've got eight percent annualized revenue growth over the last three years. That revenue growth has been lumpy at times, and I think part of that really does have to do with cultural issues that really came too ahead here over the last year plus. I'm with you. That's the answer I would expect Mr. Kotick to give. Now, by the same token, I feel like it puts Activision Blizzard in a little bit of a defensive position. I'm sure they look at this acquisition for Microsoft and they think, "Wow, this is pretty good timing. This gets us off the radar. Maybe we can get back to focusing on the business at hand." Because I think the really thing when you combine Microsoft together with Activision Blizzard, Microsoft, I think probably most people know of their gaming business just via the Xbox brand, which is fair. It's also worth remembering though, that Xbox, that hardware, really serves as the razor in that razor and blade model.
They sell that Xbox essentially to just break even. I think technically, really, they sell it at a loss. But it's simply meant to get that device in people's homes so that they continue to pay for that subscription to those Microsoft gaming services. This really builds up that portfolio of services now that they can bring Activision Blizzard and all of those properties under their umbrella. So to me, that's really fascinating if you think about it. Again, going back to that mobile opportunity, this expands that opportunity tremendously because now, it's not just the Xbox at the razor, but given the mobile opportunity, it's the smartphone that's in everyone's pockets that represents the opportunity as well. So I think you couple that together with the fact that Activision Blizzard, they're in a bit of a defensive posture today. I have to believe that Mr. Kotick thought, "Yeah, this is just the perfect time. Let's do this." Now, the question really remains is what is Bobby Kotick's role with this business going forward? Because yes, the headlines says he'll remain the CEO of Activision Blizzard, but you read down into the actual report there and you realize that he is going to be reporting to Mr. Spencer, the CEO of Microsoft gaming. That begs the question, are Mr. Kotick's days at Microsoft numbered? I tend to believe, yes. I mean, who knows? But regardless, I think this takes Activision out of the spotlight that they didn't really want to be in.
Chris Hill: Last thing before we move on, you got to tip your hat to the way Microsoft executes acquisitions. I mean, they're pretty opportunistic. You think about when they bought LinkedIn back in 2016 after LinkedIn had took a hit. Look, I remember we talked about that acquisition at the time and we were all looking at each other like, "What are they going to do with LinkedIn?" It's not a question of the money. They have the money, they can buy whatever they want and they were able to make that work. If they can make LinkedIn work, you got to feel good if you're a Microsoft shareholder.
Jason Moser: You couldn't have said that, that was very diplomatically put, Chris. I agree with you because, I'll tell you, every time I check LinkedIn out, I wonder immediately why did I just check LinkedIn out? To me, it's not a very good experience. I don't understand how it hasn't really gotten better over these years, but the fact of the matter is that Microsoft has made that work. I mean, it is a moneymaker for that business. I think that really points to the power of the network, so when you consider that network, when you consider the market opportunity in gaming. When you consider the fact that Microsoft apparently can spin gold out of virtually anything these days with Mr. Nadella leading the way, I got to like their chances with this deal.
Chris Hill: Shares of The Gap down seven percent this morning after the apparel retailer got a downgrade from one Wall Street analyst. The report outlined expectations that margins for The Gap are going to get worse, which, I mean, just ponder that for a second. I don't know what you do with The Gap here. I'm sure there are some investors looking at this saying, "Hey, look. This is a solid brand, and it is, they've got Banana Republic, they have Athleta. There's value there, and you can buy it at a discount. But this seems like one of those times where don't buy on the dip. There are too many questions marks. They're still in the process of closing hundreds of stores as part of that announcement they made back in 2020.
Jason Moser: I think you're right. I think if you're looking for a company that can handle inflationary times, by exercising pricing power, for some, I'm going to tell you, keep looking because the Gap ain't it. I don't think that's going to be something they're going to be able to handle here over the coming quarters either, I think we're going to continue to hear this discussion of inflation and how it's impacting the consumer in million ways when it comes to fashion retail. A notoriously difficult market in the easiest of times. I mean, this is not the easiest of times. I think that when you look at something like it. Yes, you're right, they've got some tremendous brands under their umbrella. I mean, you've got Gap, you've got Old Navy, and Banana Republic, Athleta. I mean, there are a lot of different ways for them to win, but I do agree. I think it is a business that is beholden to promotions and discounts.
It is a business that is beholden to input costs, particularly on the cotton side, which I don't know how often investors really think about that stuff, but it took me back to 2012, I think when we were doing a Real Money initiative here at The Motley Fool, as analysts, we're able to run our own Real Money portfolios. There were public-facing and I had invested, I'd recommended Gap as a value investment. In my argument was that there was a ton of pessimism because they have locked in these higher cotton prices and those were falling, there was a financial really impacting margins, but that at some point, that would run off and profitability would come back. That worked. I sold for a modest gain. It was a fun value investment to make because it worked. Value investing's difficult because you got to get it right on both sides. You got to buy at the right price and sell at the right price. I don't know that I would look at Gap as a value trap. I do think it's strong enough of a business where there probably is a valued thesis there, but I agree with you, I don't think we're there yet. I would be very, very cautious with this one.
Chris Hill: Fourth-quarter revenue for Goldman Sachs came in higher-than-expected. Investment banking revenue was up 45 percent year-over-year, but shares of Goldman Sachs down eight percent this morning. What's going on here? I mean, was it that bad? I get that even with the drop today, shares of Goldman Sachs are up around 20 percent over the past 12 months, but this seems like a stronger reaction than I would have expected for what is on the surface, a mixed quarter.
Jason Moser: Probably, the knee-jerk reactions of Wall Street are their own. When you miss the expectations, those questions come up. Remember, Goldman too, it's a little bit different than the banks we were talking about last week and Wells and Citi and JPMorgan because Goldman is very much more an investment bank as opposed to a bank that necessarily benefits from the consumer like Wells or JPMorgan would. I think on the whole, it was not a bad quarter. I mean, net revenue for the quarter of $12.6 billion, that was up eight percent from a year ago. Not lighting the world on fire, it looked like investment banking revenue like you noted was the Star. That revenue $3.8 billion, you saw investment banking 45 percent higher than a year ago, but again, because they are tied to that asset management, wealth management, you can make performance a little bit lumpy.
I think also you're looking at a bank here that it's going to be a bit more exposed to the cost of talent. If you remember a theme late last week when we were talking about those other banks, and Jamie Dimon noted this in JPMorgan's results that they were paying up for talent. I mean, wage inflation was real. Incentives had to be ramped up in order to get the best talent. I think you could argue that given the nature of Goldman's business, they probably are a little bit more exposed to this, probably have to pay a little bit more for talent because of the nature of the job and investment banking and that really play out on operating expenses for the business. They were 23 percent higher than a year ago, but I mean, they grew book value better than 20 percent. Now, it stands at just a little over $284 per share. That prices the stock around 1.2 times book value today and for a business that has returned close to 90 percent over the last three years, it feels like this could be a decent window of opportunity for people who are interested in a business like this.
Chris Hill: Basically, it's the opposite of The Gap, both stocks stand around 78 percent, but one of them looks like a buying opportunity.
Jason Moser: Yeah. I'm going to let you guess which one, but I have a feeling our listeners have been paying attention.
Chris Hill: Speaking of banks, before I let you go, you are coming back on Thursday with your longtime partner in crime, Matt Frankel. What are you guys are going to be talking about?
Jason Moser: Yeah. Looking forward to a little reunion there of sorts. We're going to be talking about a company in the financial space that IPO'd less than two years ago. To say it fits in that FinTech category, I would say is an apt description. We'll enjoy digging a little more into that particular business that is to be named later. We know it, but we're not going to tell you until the show, Chris. But hopefully, we'll be able to dig into it a little bit more in the understanding of the potential opportunity for investors.
Chris Hill: Sounds good. Jason Moser, thanks for being here.
Jason Moser: Thank you.
Chris Hill: It's mid January. How are those new year's resolutions going? The goals you set to get in shape and do better with money. With some actionable ways to help you stay on track, here's Robert Brokamp and Alison Southwick.
Alison Southwick: The connection between health and wealth goes beyond rhyming. Good health helps you build wealth and wealth, in turn, can help you stay healthy. It's a well-documented, but often overlooked virtuous cycle that we hope will motivate you to think twice about taking care of yourself in 2022.
Robert Brokamp: After all, it's still January, and visions of resolutions are likely dancing still in your head. Survey to survey, year-after-year, show the most popular resolutions focused on waistlines or bottom-lines. If you're hoping to get into better physical or fiscal shape in 2022, we have good news for you. Improving one might lead to improvements in the other. Consider the findings of a report from the urban institute entitled, how are income and wealth linked to health and longevity? The report concludes that as annual household income increases, the percentage of adults suffering from various health impairments decreases. We're talking heart disease, stroke, arthritis, hearing trouble, vision trouble, you name it. The higher a household's income, the lower the incidents of these chronic diseases. Here's more proof. A 2018 Washington Post article by Christopher Ingraham looked at federal guidelines for exercise, which are that adults should perform at least 150 minutes of moderate physical activity or 75 minutes of vigorous physical activity each week. They should also do some muscle strengthening activity like calisthenics or lifting weights at least twice a week. What he found was the states with the lowest percentage of adults who met that criteria also tended to have lower median incomes with the lowest being Mississippi. States with the higher percentage of adults who exercise had higher median incomes, with the highest being Colorado.
Alison Southwick: Does wealth beget health, or does health beget wealth? The chicken or the egg? Well, the answer is yes. Health can ship into your wealth or full o on decimate it, and wealth can lead to improved health. Both impact the other in multiple and not always so obvious ways.
Robert Brokamp: Yeah. Here are just three of the many ways that eating an apple a day can keep the debt collector away or something like that. Number one, people who are healthier are more productive and people who experience health problems are more likely to miss work, be stressed, or succumb to something called presentism. Basically, you're working but you're just not on top of your game. Number two, health problems can get expensive. The more money you are spending on co-pays and drugs, and artificial whatevers, the less money you have to save and invest. Number 3, one of the biggest reasons that people retire earlier than planned is poor health. People who retire earlier than planned to have fewer years contribute to their follow on case, smaller security benefits, and their nest eggs must be spread over a longer period.
Alison Southwick: Bad health can impact your wealth, but how does wealth impact to your health?
Robert Brokamp: Well, there are many ways here too, but I will just point out four. Number 1, wealthier people are more likely to have jobs with higher-quality health insurance, paid sick leave, and employer provided wellness programs. They're also were able to pay for health interventions and less likely to put off medical services due to financial concerns. Number 2, healthier people are more likely to be able to afford gym memberships, personal trainers, healthier food and other products and services that are associated with better health. Number 3, financial difficulties cause stress, and stress can in turn affect your health. Obviously, the more money you have, the less likely you will experience money-related problems. Number 4, higher-paying occupations tend to rely more on brain than brawn, thus result in less bodily wear and tear. The most physically demanding jobs, things like construction, landscaping, factory work, they generally pay average or below average incomes.
Alison Southwick: The equation for building wealth is somewhat straightforward. Earn good money, spent wisely, invest the rest for the long term. Maintaining good health is more complicated. I mean, after all, even a marathon runner can get cancer, but that's no excuse to avoid exercise and eat right. According to the Boston foundation and the New England Healthcare Institute, you can blame or thank genetics for about 20 percent of your state of health, half is the result of your behaviors.
Robert Brokamp: We do have some control over our health. But 2015 study published by The Journal progress in cardiovascular diseases, always a fun read, found that more than 11 percent of healthcare costs are due to inactivity alone. But even the rich, famous, and physically awesome get sick. Regardless of your health or wealth, you must still be prepared for any kind of medical setback and the cost they incur. That starts with that boring old advice of having an emergency fund and taking advantage of a health savings account if you're eligible for one. HSAs are the only accounts with tripled the tax advantages, contributions are pre-tax, growth is tax-deferred, and withdrawals are tax-free if used for qualified medical expenses.
It is also crucial to be sufficiently insured. Definitely health insurance, definitely life insurance if you have kids, maybe disability insurance. If you're still working, those maybe provided by your employer. I'm an ad hoc member of the benefits team here at The Motley Fool. I can tell you that there are definitely ways to utilize your insurance and benefits in ways that result in lower out-of-pocket medical expenses. Definitely take some time to learn about your coverage and other benefits. Finally, I'll just mention the old adage that it's never too late to work on your wealth or your health. A Canadian study published in 2010 found that people over the age of 65 who are physically inactive incurred $1,214 more in healthcare costs each year. Let's get a little bit more practical here, Alison. What has been most helpful for you in the past, getting healthier. Any helpful hacks you'd like to share?
Alison Southwick: I don't know if it's necessarily a helpful hack, but honestly, working from home has been the best thing for me because I have to remove all barriers to exercise in order to do it. I now wear a business mullet every day, I'm somewhat professional on top, but with sweats or black leggings on the bottom. I also use the Peloton app, but I use it with a bike that I got from the office. It's actually pretty cheap every month to do just their app if you don't have a bike. I got weights in the basement. I can ride the bike whenever. I have 45 minutes in my day and now I'm working out every day, and probably the fittest I've ever been. What about you, Bro?
Robert Brokamp: Well, last week, I mentioned a great productivity book called Take Back Your Life by Sally McGhee, and that her research found that if you put something on your calendar, you're 75 percent more likely to do it. Every day on my calendar at 9:00, 11:00, and 1:00, I get a pop that reminds me just to do a little bit of exercise. Within that reminder, I have more than 20 different exercises I could choose from, and just the stuff you would expect, push-ups, sit-ups, wall-sits, jump rope, burpees, mountain climbers, bear crawls, lightweights, whatever. I choose, whatever I feel like doing for five to 15 minutes. Now, every time that pops up, I don't always do it, especially if I'm under a deadline or something, but having that pop up every day, definitely, it has increased the amount of movement and various exercises that I do. Also, in the past, I've used accountability websites like dietbet.com, and stickk.com. That's stick with 2ks. Basically, you put money on the line to meet your goals. You essentially give them money and you lose it if you don't meet your goal. If you do, you get your money back and maybe some of the money other people lost. That has definitely helped me stick to various exercise and weight goals that I've had in the past.
Alison Southwick: Yeah. Whether you need help tracking what you're eating or something to nudge you to exercise, there's probably an app out there for you that probably also has a free trial. Rather than having to plunk down all that money at the beginning. To close, my mom, a hospice nurse, once tried to cheer up a patient. She said, "You're surrounded by so many friends and family that care about you, isn't that wonderful?" The patient replied, "I'd rather have my health." While that sounds grim, it's actually a popular opinion. A healthier retirement is a happier retirement, at least according to a survey by Age Wave and Merrill Lynch. When retirees are asked about the most important ingredients for a satisfying retirement, 81 percent said having good health, while 58 percent said being financially secure, and only 36 percent said having loving family and friends. I mean, let's face it, you might as well just get a dog, they're way better. Health, wealth, and happiness are inextricable. Take care of your health in the coming year, and wealth and happiness are more likely to follow.
Chris Hill: That's all for today, but coming up tomorrow, a closer look at one of the dominant businesses in the great outdoors, Vail Resorts. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against. Don't buy yourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
