Is Activision Blizzard a Forgotten Gem?
For those unfamiliar, Activision Blizzard (ATVI) is one of the largest gaming conglomerate in the world by market cap, worth around $36 billion. The three gaming studios they own, Activision, Blizzard, and King, make some of the most popular gaming franchises in the world including Call of Duty, Overwatch, and Candy Crush.
Activision stock has beat the market for the past five years and is up 132% during that span. However, if you are an investor in Activision, this past year has been tough. The stock is down 27% after a myriad of headwinds hit the company in 2018. Wall Street has stopped giving the company a premium growth valuation, which has many spooked about the company’s future prospects.
Why Activision is Down
The biggest reason Activision Blizzard took a hit last year is the rise of battle royale games, specifically Fortnite. The upstart franchise came out of left field to bring in $2.4 billion in revenue in 2018, which is a third of Activision’s combined 2018 revenue.
This increased competition and upending of the gaming business model (Fortnite makes all of its money from in-game purchases) contributed to Activision guiding for only $6 billion in sales in 2019, down considerably from $7.5 billion in 2018. Google also just released Stadia, a “Netflix for games” that has a decent chance to hurt Activision’s margin numbers.
Lastly, investors have started to lose their lust for Activision’s franchises. Call of Duty and Candy Crush might bring in billions for the company, but they are both old news. Eventually, they will need to produce a new hit franchise, something they haven’t done internally for quite a while.
Why Activision Might be a Value Play
Even with all these headwinds, I still like the stock at this price. The P/E is only 20, the dividend yield is approaching 1%, and the balance sheet looks healthy as ever. Sure, sales might be down next year, but the video game industry is a cyclical business and should be evaluated with a longer time horizon.
Since 2015 Activision has grown its sales 60% and net income over 100%, which I believe can continue if the gaming industry grows 11% a year for the next decade. eSports will also be a huge growth driver for the company. The Overwatch and Hearthstone competitions already have millions of fans, and they plan on applying this concept to other gaming franchises.
Overall, it looks like investors are over-appreciating the risks to Activision Blizzard, and under-appreciating the tailwinds. The stock is trading at its lowest valuation in years, and if you still believe in the long-term growth story this would be a good a time as any to scoop up some shares.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.