Is Activision Blizzard Stock A Buy?

With a lot of successful titles under its belt, a slew of new releases in the pipeline, its ability to thrive in areas like mobile and the free-to-play niche, and the explosive growth the video gaming industry is expected to achieve, Activision Blizzard gives investors many reasons to get excited about its future prospects.

Activision Blizzard, Inc. [NASDAQ: ATVI], together with its subsidiaries, publishes, develops, and distributes interactive entertainment software and peripheral products on video game consoles, personal computers (PC), and mobile devices across 196 countries in North America, Europe, and Asia.

Activision Blizzard is one of the world’s largest interactive entertainment companies, best known for some of the most iconic entertainment franchises, including Call of Duty, Skylanders, World of Warcraft, Overwatch, Diablo, Candy Crush and Bubble Witch, to name a few.

The company operates through five business units: Activision Publishing Inc, Blizzard Entertainment Inc, King Digital Entertainment, Major League Gaming, and Activision Blizzard Studios.

The company was formed in 2008 through the merger of Activision, the publicly traded parent company of Activision Publishing, and Vivendi Games, the parent company of Blizzard Entertainment, a video game developer and publisher, best known for hugely popular video games, including the Diablo series, Warcraft sequels, and StarCraft franchises, and for the massively multiplayer online role-playing game, World of Warcraft.

Vivendi purchased 52 percent of the stock in the newly-formed Activision Blizzard. The company acquired King Digital (maker of Candy Crush) in 2016 for $5.8 billion.  The video game company is based in Santa Monica, California.   

Is Activision Stock A Buy?

With the pandemic forcing people to stay indoors, playing video games seems to be the new pastime. And video game companies are cashing in on this increase in free time with video game stocks doing pretty well.

Activision Blizzard stock soared as lockdowns around the world led to a record surge in the gaming market. The gaming company’s first, second and third-quarter results all topped analysts’ expectations.

Its third-quarter earnings report, released in the tail-end of October, reaffirmed the view that it is among few of the S&P 500 value stocks expected to grow in 2020.

With more people staying home, video games have become a very important source of entertainment these days.  Even without the pandemic-enforced lockdown, video gaming was a rapidly growing industry in the US and around the globe with estimates of annual spending on the interactive entertainment medium set to reach around $250 billion by 2025 from the present $150 billion.

And Activision Blizzard, being one of the largest game creators around, is sure to benefit from this trend.

It does not take too much time to build your fortune, or lose it, in the video gaming industry. It’s more or less a “hits” based business, where a new hot game can change your fortune overnight. In a fast-evolving industry, Activision’s leadership status, however, has been a constant.

With a market cap of over $60 billion and revenue of $7.7 billion the past 12 months, the video gaming giant enjoys an undisputed numero uno position in the industry with shares gaining 33% this past year, far outpacing the S&P 500.

Not one to rest on its laurels, the company regularly releases new titles though it continues to generate a larger portion of its revenue from a few highly dependable franchises, including Call of Duty, Candy Crush, and World of Warcraft, to list a few.

Call of Duty debuted in 2003, and, with more than a dozen sequels, Activision has sold more than 300 million copies of the game.

More than 500 million people have played Candy Crush, which is usually played on mobile devices. World of Warcraft, a role-playing game played simultaneously online by large numbers of people, has more than 100 million accounts.

These three blockbuster games generated over 65% of the company’s total revenue in 2019. A few investors worry that the company’s over-reliance on a few marquee franchises may hurt the company in the long run; however, the management defends it stating, “refocusing on our greatest opportunities allows us to return to the execution excellence we’ve always been known for.”

Top-class management is another reason for Activision’s runaway success in a fickle industry. Bobby Kotick, the company’s CEO, has taken some really good decisions over the years and the video gaming company is now reaping the rewards of his foresightedness.

Kotick played an important role in the rise of subscription games like World of Warcraft in the 2000s. He arranged the merger of Activision with Vivendi (former parent of Blizzard) in 2008, and the acquisition of King Digital in 2016.

The combined studios, delivering runaway hits year after year, have provided the company with a regular source of revenue through regularly paying subscribers.

The industry is known for its rapid evolution, and the best thing about Activision is that it has never lulled itself into complacency.

The move towards downloadable games has been a blessing for the company as it has resulted in enhanced profitability owing to money saved through less packaging and less physical inventory management.

However, the real boon has been the proliferation of smartphones which has led to the massive popularity of mobile gaming.

Activision hit 390 million monthly active users in the third quarter. Leading the charge was Call of Duty Mobile, hitting the top 15 grossing lists in US app stores. King Digital drew in 249 million active users with its hugely popular Candy Crush Saga, and a few other hit games.

Activision is also in “final large-scale testing” of Call of Duty in China, with more than 50 million players preregistered. The company’s prospects look bright with the interest it has generated in the world’s largest mobile-gaming market.

New consoles and PC hardware are also helping the company’s cause. New chips from NVIDIA, featuring AI-enhanced graphics and sophisticated GPUs and chips, are all set to define the next era of gaming and Activision is sure to hugely benefit from it.  

Sony (SNE), the leader in the console gaming space, has just released PlayStation 5. The company’s closest rival, Microsoft, too, has come up with its own home video game consoles called Xbox Series X and the Xbox Series S. 

Both consoles come with impressive graphics advances, which means gaming enthusiasts can play resource-intensive games without any glitches.

Advanced hardware is always good news for companies like Activision Blizzard, which has just launched a new World of Warcraft expansion and Call of Duty game.

The company’s third-quarter results reasserted Activision Blizzard as a growth stock.  The company reported $0.71 EPS for the quarter on revenue of $1.8 billion.

Analysts were expecting earnings of $0.65 a share on sales of $1.7 billion. The firm’s revenue for the quarter was up 61.5% compared to the same quarter last year.

During the same quarter in the previous year, the firm posted $0.32 earnings per share on revenue of $1.2 billion. In other words, earnings jumped 121%, and revenue jumped 46%.

Game sales are heating up as people play more games to ward off boredom during stay-at-home-orders. The video game industry is set for explosive growth and the stay-at-home world we live in augurs well for the video game company and this is amply reflected in its stellar third-quarter results.

Activision earnings are flexing growth again, and it may be a good time to include this winner in your portfolio.

Risks of Investing in Activision

Activision Blizzard is known for routinely releasing new titles, but disruptive shifts in the industry and competition from free-to-play games are compelling studios, including Activision, to consider monetization.

Analysts opine that the company, instead of generating sales by creating and releasing new titles, should now lay more emphasis on the durability of a title and try to derive profit from it through smaller transactions over time.

Also, the arrival of new vaccines may be weighing on investors’ minds, who may be wondering if the excitement for gaming linked to the Covid-19 pandemic has run its course. The company’s conservative fourth-quarter guidance may further fan their fears.

The video game company forecasts revenue in the current period to be $2.73 billion – higher than the Wall Street forecast of $2.59 billion – but less than what investors were expecting.

Additionally, Wall Street expects the video game company’s earnings to drop by 7% to $1.15 in the fourth quarter of 2020. For the complete year, however, analysts expect Activision earnings to jump 52% to $3.41 a share.

The conservative guidance by the company may be a pointer towards a shift from the pandemic tailwind. Also, given the rise in price of shares this year, investors will have to pay a premium to own the stock.  As such, some investors may be deterred by the hefty price tag the company’s stock carries.

Are Activision Competitors a Threat?

Activision Blizzard’s top competitors include Zynga, Electronic Arts, Take-Two Interactive, Ubisoft, Epic Games and Nintendo, to name a few.

However, Activision Blizzard has deftly stayed ahead of the competition by constantly adapting and changing, which has allowed it to remain at the top despite the continuously shifting landscape.

Competitors, on the other hand, like Electronic Arts [EA], which is known for its Star Wars games and Madden NFL Football and Take-Two Interactive [TTWO], publisher of the Grand Theft Auto and Red Dead Redemption franchises, have been slow to adapt.

These companies, no doubt, have extraordinary game franchises, but have little to boast of in new game formats such as mobile gaming and free-to-play games. 

Electronic Arts posted 17% lower revenue while the revenue of TTWO was 50% less than Activision Blizzard’s. For example, Fortnite (owned by Epic), one of the most popular games in the world today, is completely free.

And Activision has done an excellent job of expanding into the new frontiers of gaming such as mobile gaming, free-to-play games or esports.

The publisher of Call of Duty, Candy Crush Saga, World of Warcraft, StarCraft and Diablo, now has leading titles in the mobile, free-to-play, and console gaming.

The free-to-play video game model, as the name suggests, comes without a fee. Gamers can download and play a title for free. The publisher scouts for revenue by encouraging in-game purchases or displaying ads.

This category has caught the imagination of gamers in a big way in recent years, with massive hits such as Fortnite boasting of an audience running into hundreds of millions.

Fortnite generates over $1 billion in annual revenue, thereby showing the financial viability of the free-to-play model. 

Activision took the free-to-play route with the release of Call of Duty Warzone, a free version of its massively popular hit franchise, Call of Duty. The company expects to generate revenue from the free-to-play game through the sale of merchandise such as player outfits and weapons.

Mobile gaming is arguably the fastest growing segment of the video game market and Activision takes the top honors here as well.

Activision operates the Candy Crush franchise, which is one of the biggest mobile games by gross sales. It is free as well and the company generates revenue through in-game advertising.

Last fall, the company also released a mobile version of Call of Duty. The game is free as well, with the company depending on in-game purchases for revenue generation.

With well-known franchises such as Candy Crush and newer hits like Call of Duty Mobile, Activision has once again confirmed its ability to thrive in the fiercely competitive mobile world as well. Apart from the emerging segments, it is also worth noting that Activision’s core business has remained strong.

Irrespective of all its strengths and foresightedness, Activision is facing intense competition from its Asian rivals. Nintendo [NTDOY] is its biggest pure-play rival, with a market cap of $65 billion and revenue of $14 billion. The Japanese gaming giant controls its own hardware, the popular Switch portable gaming consoles.

The bigger threat, though, is the Chinese multinational technology conglomerate Tencent [TCEHY]. Despite being a relatively unknown name among gamers, Tencent is the world’s largest gaming company by revenue, with major stakes in some of the world’s biggest games:  League of Legends, Honor of Kings, Fortnite, PUBG, and Call of Duty, among others.

PUBG, especially, is highly popular with US-based gamers who spend a lot of money on it — it ranked 10th in the United States for sheer consumer spend in 2019.

The company, founded in 1998, and headquartered in Shenzhen, the People’s Republic of China, owns Epic Games, which created a storm in the gaming industry with its free-to-play hit game “Fortnite” in 2017.

Is Activision Stock a Buy: The Bottom Line

In an industry cluttered with skeletons of once-dominant video gaming companies, Activision Blizzard’s focus on adaptability and constant innovation has allowed it to remain relevant through every trend in gaming.

The video game company has been quick to adopt to newer, fast-growing areas like mobile and the free-to-play niche. 

Activision continues to register strong performance in mobile gaming where its blockbuster titles like Call of Duty Mobile and Candy Crush Saga continue to pull in hundreds of millions of gamers to its audience base. 

This helped the company deliver sales up to $5.7 billion through the third quarter, whereas it had generated $4.5 billion in the same period a year earlier. For the third quarter, Activision reported EPS of 71 cents a share, up from a year-ago profit of 32 cents a share.

The Covid-19 pandemic wrecked many balance sheets, but Activision, in contrast, was a beneficiary as the Covid-19 pandemic led to more game play by people stuck at home. However, it would be grave injustice to the company to credit its success solely to stay-at-home time fostered by government-mandated lockdowns.

Activision recognizes more-frequent releases and updates on new platforms, along with new monetization models, all of which have played a pivotal role in its accomplishments. The video game maker continues to release new games from popular franchises at regular intervals, which keeps the audience interested, and in turn, elicits a higher level of engagement.

Strong outlook for the Call of Duty Refresh and World of Warcraft Expansion in 4Q would be encouraging for investors despite the guidance leaning a bit on the conservative side. CEO Kotick expects a holiday quarter with more than $2 billion in sales supported primarily by the record size of the Call of Duty audience.

Activision is expected to come out with its fourth-quarter 2020 results in February, and we will have to wait till then to find out whether Activision surpasses that outlook, as it did last quarter.

According to Kotick, Activision plans to hire about 2,000 people in the next 14 months. Around 60% of the new hires would be for development, creative and production to ensure the company keeps coming up with a steady flow of content for different platforms. The CEO also emphasized that the company hasn’t experienced any delays for 2021 titles yet.

New generation of game consoles released in November from Microsoft Corp and Sony Corp and demand for Activision’s popular titles, compatible with these systems, is also going to bring in additional revenue for the company. The video game maker came out with a slew of new releases in November, including Call of Duty: Black Ops Cold War and World of Warcraft: Shadowlands, among others.

To sum it up, given Activision’s diverse library of successful franchises, widening global entertainment platform, and its ability to capitalize on a potential disruptive shift in the gaming industry, it is one gaming stock that should be definitely on your radar as the industry moves past the pandemic.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.