[Updated: 10/29/2021] ATVI vs. EA
We think that Activision Blizzard (NASDAQ: ATVI) currently is a better pick compared to Electronic Arts stock, given its market valuation and better financials. ATVI stock trades at 20x trailing EBIT, compared to 44x for EA. Although both the companies have seen a pickup in demand during the pandemic, as people were confined to their homes and eschewing more public forms of entertainment, the gradual opening up of economies has resulted in user engagement levels seeing slower growth over the recent quarters. Electronic Arts, in particular, has been on an acquisition spree with Playdemic, Codemasters, Metalhead Software, and Glu Mobile acquisitions announced this year. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Activision Blizzard vs Electronic Arts: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Activision Blizzard’s Revenue Growth Has Been Stronger
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While Electronic Arts saw its revenue decline 1% over the last twelve-month period, Activision Blizzard’s revenues have actually grown 28%. Even if were to look at the last three-year period, Activision Blizzard’s revenue grew at a CAGR of 5% vs. 3% for Electronic Arts. Activision Blizzard has benefited from continued high user engagement levels for its top-selling franchise – Call of Duty – along with growth in World of Warcraft as well as Candy Crush franchises, while FIFA has been the key growth driver for Electronic Arts. Our Activision Blizzard Revenues dashboard provides more insight on the company’s revenues.
With economies now opening up gradually, the user engagement levels for gaming are expected to decline, when compared to 2020, but remain higher compared to the pre-pandemic levels. With new game launches planned over the coming years, both the companies are expected to see a rise in revenues and earnings. For Activision Blizzard, the launch of Call of Duty: Vanguard next month will be the key growth driver in the near term. For Electronic Arts, its Battlefield 2042 game, also scheduled for next month release, will bolster its sales growth.
2. Activision Blizzard’s Margins Are Superior
Similar to the pattern seen in revenue growth, Activision Blizzard’s operating margin of 35% over the last twelve month period is much better than the 16% for Electronic Arts, and it compares with 25% and 20% figures seen in 2019, before the pandemic, respectively. Even if we were to look at the last three-year average operating margin, Activision Blizzard’s 28% figure is superior to 22% for Electronic Arts. Overall, for Activision Blizzard, the margins are on a rise, while they are trending downward for Electronic Arts.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for gaming may see a slowdown, compared to 2020. That said, new game launches, and the holiday season, will likely aid the overall revenue growth in the near-term for both the companies.
Now, Activision Blizzard’s current valuation is more attractive than that of Electronic Arts, with ATVI stock trading at about 20x trailing EBIT, versus 44x for EA. Activision Blizzard has demonstrated better revenue growth and it is more profitable. Not only that, even if we were to look at financial risk, Activision Blizzard has a better cash position with 39% cash as a percentage of assets, compared to 29% for Electronic Arts. However, total debt load for Activision Blizzard is higher at $3.6 billion, compared to around $2.0 billion for Electronic Arts.
Overall, Activision Blizzard trumps Electronic Arts in most of the metrics that matter for investors and we think this gap in valuation between the two companies is not justified. In fact, looking forward, it is likely that the gap in valuation of these two companies will narrow in favor of the less expensive stock – ATVI – with its better profitability and no extra risk.
[Updated: 9/15/2021] ATVI Stock Decline
The stock price of Activision Blizzard (NASDAQ: ATVI) reached its all-time high of around $105 in Feb this year. It hovered in the 90s levels between Feb and Jul before seeing a sell-off in late-Jul and early-Aug to levels of under $80. ATVI stock currently trades at $78, reflecting a 25% decline from its Feb highs. There are two factors driving the stock down. 1. There is a fall in user engagement levels when compared to last year, but this was anticipated as people spent more time on gaming with shelter-in-place restrictions last year, and now with the global vaccination rate rising, people have started to venture out of their homes. 2. A California based agency filed a lawsuit against Activision Blizzard for sexual harassment and discrimination, and this did not bode well with the investors. To add to its woes, the employees of the company and a major media labor union have recently filed an unfair labor practice lawsuit against Activision Blizzard. The company is accused of worker intimidation and union busting.  But now that ATVI stock has declined 3% so far this week and it is also down 13% year-to-date, will it continue its downward trajectory over the coming weeks, or is a recovery in the stock imminent?
According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for ATVI stock average 1% in the next one-month (twenty-one trading days) period with only a 53% probability of a positive return, after experiencing a 5% drop over the previous week (five trading days). But how would the returns fare if you are interested in holding ATVI stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Activision Blizzard stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!
Some Fun Scenarios, FAQs & Making Sense of Activision Blizzard Stock Movements:
Question 1: Is the average return for Activision Blizzard stock higher after a drop?
Answer: Consider two situations,
Case 1: Activision Blizzard stock drops by -5% or more in a week
Case 2: Activision Blizzard stock rises by 5% or more in a week
Is the average return for Activision Blizzard stock higher over the subsequent month after Case 1 or Case 2?
ATVI stock fares better after Case 2, with an average return of 0.9% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 1.6% for Case 2.
In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.
Try the Trefis machine learning engine above to see for yourself how Activision Blizzard stock is likely to behave after any specific gain or loss over a period.
Question 2: Does patience pay?
Answer: If you buy and hold Activision Blizzard stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.
Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!
For ATVI stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:
You can try the engine to see what this table looks like for Activision Blizzard after a larger loss over the last week, month, or quarter.
Question 3: What about the average return after a rise if you wait for a while?
Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.
It’s pretty powerful to test the trend for yourself for Activision Blizzard stock by changing the inputs in the charts above.
[Updated: 8/6/2021] ATVI Stock Update
Activision Blizzard (NASDAQ: ATVI) recently reported its Q2 results, which were better than the street estimates. The company reported revenues of $1.9 billion, in-line with our forecast, and higher than the consensus estimate of $1.8 billion. The company’s adjusted EPS of $0.91 was well above $0.78 per Trefis and $0.75 consensus estimates. All three segments – Activision, Blizzard, and King – saw a y-o-y decline in sales. This is due to a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for Activision Blizzard. However, the engagement levels remain much higher than they were before the pandemic, a trend likely to continue going forward.
Looking forward, the company has raised its outlook for revenues to be around $8.6 billion, and adjusted EPS to be $3.54 for the full-year 2021. Despite an upbeat quarter, and a strong outlook, ATVI stock hasn’t seen much appreciation since it reported the Q2 earnings. In fact, it is down 14% over the last one month. This can be attributed to a recent sexual harassment and discrimination scandal, and a California based agency filing a lawsuit against the company. While the company’s management has stated that it has taken important steps and it will continue to take necessary actions to address any cases of discrimination or harassment, the scandal hasn’t been received well with the investors.
That said, we maintain our Activision Blizzard Valuation of $119 per share, based on expected adjusted EPS of $3.85 and a P/E multiple of 31x, reflecting a solid 45% premium to the current market price. In fact, the average price of analysts’ estimates stands at $117. This suggests that ATVI stock is significantly undervalued at the current levels, and investors can use this dip as a buying opportunity for long term gains.
[Updated: 6/29/2021] Activision Blizzard Q2 Earnings Preview
Activision Blizzard (NASDAQ: ATVI) is scheduled to report its Q2 2021 results on Tuesday, August 3. We expect the company to likely post revenue and earnings above the consensus estimates, primarily led by continued growth in the Call of Duty franchise as well as World of Warcraft. Activision Blizzard should see an overall pickup in demand due to higher gaming engagement levels seen over the recent quarters. We expect the company to navigate well based on these trends over the latest quarter.
Furthermore, our forecast indicates that Activision Blizzard’s valuation is $119 per share, which is a large 40% premium to the current market price of around $85. Our interactive dashboard analysis on Activision Blizzard Pre-Earnings has additional details. Actually, the premium has risen over the last few days, given that ATVI stock saw a 6% decline in a single trading session on Tuesday, July 27. The decline came in after the company is being sued for a hostile work environment. Furthermore, the company’s initial response to the allegations angered its employees and hundreds of them staged a walkout.  How this impacts the company’s performance is yet to be seen, but surely this development didn’t bode well with the investors.
(1) Revenues expected to be slightly above the consensus estimates
Trefis estimates Activision Blizzard’s Q2 2021 revenues to be around $1.95 billion, slightly above the $1.85 billion consensus estimate. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has remained on the higher side, aiding Activision Blizzard’s sales over the recent quarters. Furthermore, the company has been focused on its free-to-play offerings across mobile, PC, and console, given that it was able to add over 100 million players in a little over a year just for the Call of Duty franchise. The company is now replicating this free-to-play offering across its other franchises, which will likely result in an increase in user-engagement levels, and its in-game sales. Activision Blizzard’s Q1 2021 sales were also up 27% y-o-y to $2.3 billion, with growth seen in all of its segments. Our dashboard on Activision Blizzard Revenues offers more details on the company’s segments.
2) EPS likely to be slightly above the consensus estimates
Activision Blizzard’s Q2 2021 adjusted earnings per share (EPS) is expected to be $0.78 per Trefis analysis, slightly above the consensus estimate of $0.75. The company’s adjusted net income of $768 million in Q1 2021 reflected a solid 30% rise from its $591 million figure in the prior-year quarter, primarily due to higher revenues. For the full year 2021, we expect the adjusted EPS to be higher at $3.81 compared to $3.21 in 2020. The company has reduced its sales and marketing costs over the recent quarters, and we expect this trend to continue in the near term.
(3) Stock price estimate 40% above the current market price
Going by our Activision Blizzard’s Valuation, with an EPS estimate of $3.81 and a P/E multiple of 31x in 2021, this translates into a price of $119, which is roughly 40% above the current market price of around $85. In fact, at the current market price of $85, ATVI stock is trading at just 22x its 2021 EPS estimate of $3.81. The 22x figure compares with levels of over 26x seen in 2019 and a 29x figure seen as recently as late 2020, implying there is more room for growth in ATVI stock.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.
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- Activision Blizzard employees file unfair labor practice suit against company, Shannon Liao, The Washington Post Sep 14, 2021 [↩]
- Blizzard employees walk out over company’s handling of discrimination, sexual harassment suit, Shannon Liao, July 28, 2021, The Washington Post [↩]