Why Did Activision Blizzard Stock Double While Its Sales Grew A Mere 2%?

by Trefis Team
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Activision Blizzard’s stock (NASDAQ:ATVI) has gained a whopping 111% in the last 3 years or so, since the end of 2016, and it was up 70% prior to the pandemic-driven market fall. But how did the company manage to pull off this tremendous feat considering its revenue grew by a mere 2% between 2016 and 2019? Here is why – As it turns out, the investors rewarded the company by putting a higher value on its future growth – thus, expanding its P/E multiple significantly. Our dashboard, ‘Why Is There A Mismatch In The Rate At Which Activision Blizzard’s Revenues And Stock Price Have Changed?‘, summarizes key factors that drove Activision Blizzard’s stock over the past 3 years.

Activision Blizzard’s Margin Expansion

Between 2016 and 2019, Activision Blizzard’s EPS (Non-GAAP earnings per share) saw a 5.7% jump, led by margin expansion, which grew 10% from 25.0% to 27.5% over the same period. What led to margin expansion? The company continued to focus on digital downloads, which usually garner higher margins than physical games, and it helped reduce its COGS (cost of goods sold). The margin growth was also bolstered by lower selling expenses and taxes, as detailed in Activision Blizzard Margins dashboard.

Investors Gave A Thumps Up To This Change

Driven by a 10% jump in net income margins and a modest 2% revenue growth, Activision Blizzard’s EPS increased from $2.19 per share to $2.31 per share. While the stock price increase was primarily based on the P/E Multiple expansion, investors also took into account the timing of releases as well as the earnings growth. For gaming publishers, revenues are dependent on the success of games. Now Activision Blizzard didn’t release any expansion in 2019 for one of its popular games, World of Warcraft, which led to a significant revenue decline for its Blizzard segment, something we detail in Activision Blizzard Revenue dashboard. But during 2020, the company plans to release the expansion for the game, along with new game launches.

Furthermore, Activision Blizzard stands to benefit in the current crisis, as the demand for gaming is seeing traction, given that more people are confined to their homes, eschewing more public forms of entertainment. Even before the crisis, Activision Blizzard was doing well with its stock up 25% in 2019, led by continued demand for the Call of Duty franchise. The latest game in the franchise was ranked #2 in top selling games in March 2020. In the current environment, it is likely that the game will continue to generate more sales. Investors realize the future growth prospects, and that is why the stock is up 25% year-to-date, significantly outperforming the broader markets, with the S&P 500 down 12%. As a result, the P/E multiple increased from 16.2x in 2016 to 25.5x in 2019, and to 29.4x currently, a jump of 77%. This is in contrast with the overall market (S&P 500) that saw barely any change in its implied P/E ratio.

Wondering how Zynga’s stock has done during this time, and over the last few years? As a matter of fact, Zynga’s revenues and margins have both grown at a much faster pace than Activision Blizzard, and Zynga’s stock has doubled over the last 2 years.

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