The stock price of Activision Blizzard (NASDAQ:ATVI) is now up around 2x from the levels it was on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks a significant outperformance compared to the S&P which moved 74% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. This outperformance can be attributed to strong growth in overall gaming demand as many people remained confined to their homes, eschewing more public forms of entertainment. ATVI stock is also up 120% from levels of around $47 seen in early 2019.
Some of the 120% growth seen over the last 2 years is justified by 8% growth seen in total revenues, which stood at $8.1 billion in 2020, compared to $7.5 billion in 2018. Activision Blizzard’s net margins have also improved from 24.6% to 27.2% on a GAAP basis and from 28.0% to 30.9% on a Non-GAAP basis over the same period. This clubbed with a 1% increase in total shares outstanding due to share issuances, meant that the company’s earnings grew 18% from $2.40 in 2018 to $2.82 in 2020 on a per share and GAAP basis. A similar growth was seen in the Non-GAAP EPS as well. A 5% decline in sales and marketing costs aided the margin expansion. Given the robust performance over the recent years, the company’s P/E multiple has also expanded, and we believe ATVI stock is likely to see more upside in the near term. Our dashboard, ‘What Factors Drove 121% Change In Activision Blizzard Stock between 2018 and now?‘, has the underlying numbers.
Activision Blizzard’s P/E multiple expanded from 19x in 2018 to 30x in 2019 and 32x in 2020. While the company’s P/E is 36x now (based on trailing GAAP EPS), there is a potential upside given the expected growth in EPS over the coming years, as well as comparing the P/E multiple to that of its peers, as we discuss in the section below.
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So what’s the likely trigger and timing for upside?
While the Covid-19 pandemic has resulted in a challenging environment for most of the companies, Activision has managed to grow its revenues as well as margins, led by an increase in gaming demand, and its content, including Call of Duty franchise. As we dive into full-year 2020 results, Activision Blizzard has seen a strong revenue growth of 25% (y-o-y), led an increase in monthly active users (MAUs), primarily for Activision segment. Total MAUs for Activision almost doubled from 60 million in 2019 to 116 million in 2020. This can be attributed to the success of its latest Call of Duty game, which garnered over $1 billion in sales within a month of its launch. The company in its recent quarterly earnings conference call stated that it aims to widen its reach from 400 million players (across all games) currently spread across 190 countries, to 1 billion players over the coming years. Not only has the company managed to grow its revenues, it also posted margin expansion in a tough environment given the pandemic. Activision Blizzard’s Non-GAAP net margin of 30.5% in 2020 reflects a solid 300 bps plus move y-o-y.
Looking at valuation, one may argue that the P/E multiple of 32x is expensive compared to levels of 26x in 2019 and 28x in 2020. However, Activision Blizzard is expected to post strong earnings growth going forward, led by continued expansion of its existing franchises, and new game launches. For perspective, the company’s 2022 EPS is estimated to be $4.30, and at the current price of $102, it is trading at 24x P/E multiple. Now, the 24x figure for Activision Blizzard compares to the 33x figure for Take Two Interactive, implying ATVI stock trades at a relatively cheaper valuation and it can continue to trend higher in the near term.
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