After the recent Microsoft (NASDAQ:MSFT) deal announcement, Activision Blizzard (NASDAQ:ATVI) stockholders should’ve breathed a sigh of relief. The past few months have been terrible for Activision Blizzard. Corporate scandals and delays in some of its major gaming titles have haunted the company. To make matters worse, its active user base growth has slowed over the past few quarters. Hence, the Microsoft announcement couldn’t have been at a better time for the company but that doesn’t mean that ATVI stock is a safe bet.

Activision is one of the top video game producers globally, concentrating on some of the most popular franchises. On top of that, it is one of the most profitable companies globally, having eight franchises producing over $1 billion in revenues.

However, of late, the company has been underperforming, raising questions about its long-term outlook. Moreover, there is a great chance that its deal with Microsoft may fall through. Hence, there are plenty of red flags with ATVI stock making it a risky bet.

The Deal Might Not Go Through

Microsoft will be under the scanner of the U.S. government after its blockbuster deal to acquire Activision Blizzard. Microsoft is one of the tech giants which has stayed off the radars of the country’s antitrust regulators. However, its recent announcement is unlikely to go unnoticed. Given the massive size of the deal, Microsoft could potentially climb inside the top three video game makers in terms of sales.

The Federal Trade Commission (FTC) is currently led by the sprightly Lina Khan, who has an ambitious plan to crack down on companies that are seeking to reduce competition. The goal is to implement sweeping reforms which will prevent anti-competitive mergers. The Microsoft-Activision deal could be a golden opportunity for Khan to prove her plans’ seriousness.

On top of that, both companies will also have China’s antitrust regulators to deal with. Beijing has targeted some of the top tech companies in the country for their anti-competitive behavior. I won’t be surprised if it objects to the potential acquisition. Furthermore, China will also want to protect some of its top video game companies, including Tencent (OTCMKTS:TCEHY).

Microsoft may have to bear substantial breakup fees if the deal falls through. The merger agreement terms show that Microsoft will have to pay a whopping $3 billion in breakup fees to Activision Blizzard. This is over 30% of Activision’s revenues.

Bleak Outlook Ahead

The going has been incredibly tough for Activision of late. It’s been at the center of multiple controversies, including those which have resulted in several executive resignations. On an internal front, its business hasn’t been up to snuff either. Its age-old franchises are witnessing a substantial slowdown in users. The company’s audience peaked at 435 million users during the first quarter last year. As of the fourth quarter, its active user base is down to 371 million.

During the fourth quarter, its bookings fell 18.4% from the prior-year period to $2.49 billion, falling short of analyst estimates. In addition, in-game net booking dropped from $1.32 billion to $1.24 billion. With the latest iterations of two of its top franchises in Overwatch and Diablo being delayed to 2023, things look incredibly bleak this year.

On top of that, if the Microsoft deals go through, the exclusivity of some of its top video game titles will severely impact its user base.

Bottomline on ATVI Stock

Activision Blizzard is up against it, as it looks for something fresh with its business.

As market analysts question its long-term attractiveness, its user base has slowed down considerably over the past few quarters. A potential exclusivity agreement with Microsoft will further limit user growth for the company. Moreover, the likelihood of the deal going through is also uncertain.

Hence, ATVI stock presents too many risks at this time.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.