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Is Activision Blizzard’s stock the best play in the gaming business?

As one of the world’s largest videogame companies, Activision Blizzard [ATVI] is known for producing strong returns off the back of hit titles such as Call of Duty, World of Warcraft and Candy Crush. However, since Activison's stock reached an all-time high of $83.19 on 28 September 2018, the stock’s price has nearly halved – down more than 45% at $45.57 as of 22 July 2019 – in line with its 50-day moving average. 

A recent bout of bad press has seen the stock trade lower. Internal tensions between the company’s three main businesses arms – Activision, Blizzard and King – forced it to make 8% of employees redundant at the start of the year as part of a restructuring plan.

 

Analysts remain bullish due to mobile focus

Despite the stock's recent struggles and a recent lag in game releases, the company’s shares have managed to maintain an average “buy” rating among 30 analysts, who have average price targets of $52 for the year, representing an upside of about 14% from current levels. 

Michael Pachter, analyst at Wedbush Securities, is one of the more bullish tracking the stock, with an outperform rating and a $56 price target. 

Pachter notes that the firm is planning to release more mobile games from franchises across the three core businesses, including a Call of Duty mobile game that’s being developed in collaboration with Tencent and a sequel to first-person shooter game Diablo Immortal, which he thinks will be released sometime this year.

Given the size of the mobile videogame market, the upcoming release of the two games could be a massive growth driver for Activision Blizzard.

 

Uniting Activision, Blizzard and King

While the firm has a strong track record for developing games that have continued to drive its revenue upwards, its Blizzard division had the lowest operating margin at 16% in Q1 2019 due to an in-game revenue decline.

Across the three businesses, its Activision unit is by far the best performing in its annual results with revenue topping $2.45bn in 2018 as opposed to Blizzard’s $2.29bn. 

16%

Blizzard division's operating margin, the lowest of the company's three units

But when it comes to quarterly performance, the company’s mobile segment King Digital Q1 2019 revenues outperformed its other segments at $529m. Before the start of the year, King had seen its revenue over the last three years lag behind but has been making big strides recently with monthly active users totalling 272 million thanks to the segment’s highest revenue generating franchise: Candy Crush.

In an effort to streamline operations, Activision is now working more closely with Blizzard to leverage company-wide expertise – and impose a higher degree of financial discipline.

Recently Activision has been leveraging the existing framework of Blizzard’s The Overwatch League in order to build a Call of Duty league and expand its esports footprint.

“The upcoming launch of our new Call of Duty esports league reaffirms our leadership role in the development of professional esports,” CEO Bobby Kotick said in the company’s Q1 results, which credited its esports efforts as the main driver for the better-than-expected earnings.    

“Our owners value our professional, global city-based model, the success we have had with broadcast partners, sponsors and licensees, and the passion with which our players have responded to our events,” he added. 

“The upcoming launch of our new Call of Duty esports league reaffirms our leadership role in the development of professional esports” - CEO Bobby Kotick

Activision Blizzard’s strategic shift towards focusing on mobile will likely be a positive growth catalyst – although its success won’t be known until it reports Q2 results on 8 August 2019.

 

Esports key to long-term growth

When Activision Blizzard launched The Overwatch League in 2018, it effectively created the world’s first esports league. The company used one of the most popular videogame franchises to model itself on how traditional sports leagues operate, with games taking place at the Blizzard Arena in California. 

At the end of last year, eight new teams were added to the league, with new teams reportedly expecting to pay expansion fees of between $30m to $60m for the next season.

But while esports leagues and companies look to expand their reach, some analysts are warning they may be getting ahead of themselves.

Wedbush’s Joel Kulina cautions interest in Overwatch seems to be fading, highlighting in a CNBC interview that a “major content boost” may be needed to help generate “more buzz”. 

The stock’s valuation could be starting to attract those traders using a longer-term time horizon though; shares currently trade at a TTM PE ratio of 23.58, which is lower than its peers as well as the industry’s average of 39.61.

 

Market cap$34.90bn
PE ratio (TTM)19.99
EPS (TTM)2.28
Return on Equity (TTM)16.44%

Activision Blizzard stock vitals, Yahoo finance, 23 July 2019

 

The stock’s price relative to the company’s book also looks appealing, that ratio coming in at 4.91, which is below the industry’s 5.52. Analysts, however, remain sceptical in regards to earnings potential, as estimates for Q2 range on the lower side between $0.22 and $0.30, according to Zacks. Activision Blizzard had reported earnings of $0.41 per share in Q2 2018.

At least revenue generation for the foreseeable future looks robust, the gaming giant has a dedicated following across all three operating segments that will ensure a base level of recurring revenue over the short- to mid-term.

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