Is Activision Blizzard Still A Buy?

by Trefis Team
Activision Blizzard
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Activision Blizzard (NASDAQ:ATVI) stock grew 13.6% from $59 in the beginning of this year to $67 as of April 24, compared to over a 10% decline for the broader S&P 500. While Activision Blizzard stock has outperformed the broader markets, we believe there is still an upside potential of around 10% from the current levels. Why is that? Activision Blizzard, along with other gaming companies, could see higher sales, given that more people are confined to their homes, and the average time spent on gaming is on a rise over the recent months. Moreover, Activision Blizzard’s stock was actually down 5% between 2017 and 2019, as compared to over 20% growth for the S&P 500. Our dashboard, ‘What Factors Drove 7% Change In Activision Blizzard’s Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Activision Blizzard’s stock price decline of 5% between 2017-19 can be attributed to its lackluster earnings, primarily in 2019. The company’s revenues were down -7.5% from 2017 to 2019, primarily in 2019, due to headwinds in the Blizzard segment, as there was no World of Warcraft title release, and lower user engagement levels for Earthstone and Overwatch. Though adjusted net income margin grew 329 bps from 24.2% in 2017 to 27.5% in 2019. There was a modest increase in number of shares outstanding over the same period. Strong margin expansion offset the decline from lower revenues and modest growth in shares outstanding, resulting in 4.4% adjusted EPS growth.

Finally, Activision Blizzard’s P/E multiple declined from 28.0x in 2017 to 25.5x in 2019. While Activision Blizzard’s P/E is up to about 28.8x now, given the volatility of the current situation, there is an additional possible upside for the company’s multiple, when compared to levels seen in the past years – P/E of 28.0x at end of 2017, and 28.8x currently.

How Is Coronavirus Impacting Activision Blizzard’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity, and people are confined to their homes. This situation has so far been good for gaming companies, evident from the stock price movement vis-a-vis broader markets. In fact, there has been over a 70% surge in video game usage during peak hours, while gaming spend grew 34% y-o-y on software. While this trend is favorable for most of the gaming companies, the question arises what’s special about Activision Blizzard stock, and the short answer to that is Call of Duty.

The latest game in the Call of Duty franchise, Call of Duty: Modern Warfare, was released in November 2019, and it is currently the top selling game of 2020. The game garnered sales of over $1 billion within one month of its launch, and with the latest rankings placing it at top spot thus far in 2020, will likely bolster Activision Blizzard’s Q1 2020 revenue growth. Not to mention the company will likely release the next title in Q4 2020. One reason for the company’s lackluster performance last year was the absence of a World of Warcraft title, which is confirmed (World of Warcraft: Shadowlands) in 2020, and the comparable segment sales will likely be very high.

Between January 31st and April 24th, Activision Blizzard stock is up 14%, vs. over a 10% decline in the S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Despite these concerns, the outperformance of Activision Blizzard stock is noteworthy. We believe Activision Blizzard’s Q1 results in May will confirm the trend in revenues.

There may be more buying opportunities, such as Zynga in the gaming sector.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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