Activision Blizzard Stock Can Offer 20% Gains

Activision Blizzard stock (NASDAQ: ATVI) lost more than 12% – dropping from $59 at the beginning of the year to $52 in late March – then jumped 52% to around $79 now. That means it is now up 33% from the levels where it started the year. This marks a much better performance compared to the broader markets, with the S&P 500 up 12% year-to-date. Why? Activision Blizzard has actually benefited 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. Additionally, while the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus followed by the availability of a vaccine as early as December 2020 has helped the markets stage a strong recovery.

But is this all there is to the story?

Not quite. Despite the recent gains, Trefis estimates Activision Blizzard Valuation at about $95 per share, roughly 20% above the current market price based on two key opportunities.

The first opportunity we see is to Activision Blizzard Revenue growth over the coming years. Activision Blizzard Revenues have seen a 7% decline from around $7.0 billion in 2017 to $6.5 billion in 2019, partly due to fewer gaming titles. But as we look forward, we expect the sales to increase a solid 28% to $8.3 billion in 2021, primarily led by continued growth in its Call of Duty franchise games, expansion of King Digital’s games, as well as the Blizzard segment’s recently launched expansion – World of Warcraft: Shadowlands. Activision Blizzard’s revenues in the first three quarters of 2020 have grown 26%, rising to $5.7 billion from $4.5 billion in the prior year period. Call of Duty has been the most successful game for Activision, and its latest game, Call of Duty: Black Ops Cold War is expected to be a big hit as well. For perspective, its previous title – Call of Duty: Modern Warfare – garnered sales of over $1 billion within months of its launch.

Furthermore, 2020 marks the launch of new generation consoles from Microsoft and Sony, and the new consoles sales are expected to be high over the coming years. In fact, Sony PS5 sales topped 2 million unit sales on its two launch days, while the Xbox Series X and Xbox Series S sales topped 1 million units, according to VGChartz estimates. The newer consoles, though, have backward compatibility, which allows users to play certain games already owned by the user, it will also result in an increased software demand, boding well for gaming companies such as Activision Blizzard. Console gaming accounts for roughly one-third of the company’s total sales.

The second key opportunity stems from Activision Blizzard’s valuation multiple compared to its own historical multiple, as well as that of its peers. The stock now trades at 23x its projected fiscal 2020 adjusted earnings per share of about $3.45. In comparison, to earn close to $3 per year from a bank, you’d have to deposit about $300 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At Activision Blizzard’s current share price of roughly $79, we are talking about a P/E multiple of around 23x based on expected 2020 adjusted earnings of $3.45, and we think a figure closer to 28x will be appropriate.

The 23x figure compares with levels of 28x and 26x for Activision Blizzard seen in 2017 and 2019 respectively. Some of the other gaming companies, such as Take Two Interactive, currently trades at $180, implying 32x its estimated full year earnings of $5.57. With revenue growth driven by expansion of its franchises and new generation consoles, clubbed with margin expansion due to higher contribution of in-game offerings, this will result in strong earnings growth over the coming years.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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