Should You Buy Activision Blizzard Stock At $100?

[Updated: 6/15/2021] ATVI Stock Update

We believe that the stock price of Activision Blizzard (NASDAQ:ATVI) looks attractive at current levels of around $100, despite it being up 68% since the beginning of 2020, compared to a 31% rise for the broader S&P 500 index. This outperformance can be attributed to strong earnings growth seen over the recent quarters, as stay-at-home restrictions during the pandemic resulted in increased demand for gaming. The company benefited from an increase in user base for its blockbuster franchises, including Call of Duty and Candy Crush Saga.

ATVI stock is also up 113% from levels of $47 seen toward the end of 2018. The rise over the last two years or so is justified given the company’s robust fundamentals. Activision Blizzard reported total revenue of $8.1 billion in 2020 compared to $7.5 billion in 2018 and $6.5 billion in 2019. Lower revenues in 2019 can primarily be attributed to lower revenues from the Destiny franchise, given that the company sold the publishing rights for Destiny to Bungie in December 2018.

Activision Blizzard saw its net margins expand 260 bps to 27.2% in 2020, compared to 24.6% in 2018, resulting in a 19% rise in net income. The company’s total shares saw a 1.4% growth over this period, and on a per share basis, earnings grew 17% to $2.85 in 2020, as compared to $2.43 in 2018. Given the earnings growth over the recent years, and the increased gaming demand during the pandemic, this resulted in Activision Blizzard’s P/E multiple rising from 19x in 2018 to 33x in 2020. Our dashboard, ‘What Factors Drove 113% Change In Activision Blizzard Stock between 2018 and now?‘, has the underlying numbers.

Outlook

Although the Covid-19 pandemic has resulted in a challenging environment for most companies, gaming companies however, such as Activision Blizzard, have managed to grow their revenues as well as margins, led by an increase in gaming demand. The strong revenue growth that Activision has seen over the recent quarters can also be attributed to its free-to-play offerings across mobile, PC, and console. This has helped the company 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, with an aim of 1 billion users over the coming years, compared to 400 million currently. This will result in higher revenues from live services and bolster the company’s top-line growth.

Looking at valuation, at the current price of around $100, ATVI stock is trading at 26x its expected adjusted EPS of $3.80 for the full year 2021. The 26x figure compares with the 26x figure seen in 2019 and 28x seen as recently as late 2020 (based on adjusted EPS). We believe that Activision Blizzard stock deserves a higher multiple given the expected strong earnings growth going forward, led by continued expansion of its existing franchises, and new game launches. For perspective, the adjusted earnings growth stood at 18% between 2018 and 2020, while it is estimated to be 36% between 2020 and 2022. Also, the company has a solid balance sheet with close to $6 billion in net cash, and it won’t be surprising if the company decides to take the M&A route for further expansion.

While ATVI stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for IAC Interactive vs Activision Blizzard.

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[Updated: 5/5/2021] ATVI Q1 Update

While the stock price of Activision Blizzard (NASDAQ:ATVI) has seen a 5% drop over the last five trading days, it is likely to rise in the near term, after the company announced better than expected Q1 results. Activision Blizzard’s Q1 revenue of $2.1 billion was ahead of the $1.9 billion revenue forecast per Trefis estimates and $1.8 billion consensus estimates. Similarly, the company’s adjusted EPS of $0.98 per share was much higher than our forecast of $0.75, and the $0.70 consensus estimate. Activision Blizzard also raised its EPS guidance for the full year to $3.42 from $3.34 earlier.

This robust performance can be attributed to strong growth in the Call of Duty franchise, along with increased demand for the Candy Crush franchise. The strong revenue growth that Activision has been witnessing over the recent years can primarily be attributed to its free-to-play offerings across mobile, PC and console. This has helped the company 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, with an aim of 1 billion users over the coming years, compared to 400 million currently. Investors will likely be happy with the company’s Q1 performance and the stock was up 5% in after market trading hours, post the earnings announcement.

Now that the stock has seen a decline of 5% in five trading days, can it continue its downward trajectory, or is a rebound in ATVI stock imminent? Going by historical performance, there is a 57% chance of a rise in ATVI stock over the next month. Out of 168 instances in the last ten years that ATVI stock saw a five-day decline of 5% or more, 95 of them resulted in ATVI stock rising over the subsequent one month period (twenty-one trading days). This historical pattern reflects 95 out of 168, or about a 57% chance of gain in ATVI stock over the coming month. Furthermore, given the strong earnings beat in Q1, and based on our recently updated Activision Blizzard’s Valuation of $119, based on our revised EPS estimate of $3.81 and a P/E multiple of 31x in 2021, we believe the stock is likely to see higher levels in the near term.

[Updated: 5/3/2021] ATVI Q1 Earnings Preview

Activision Blizzard (NASDAQ: ATVI) is scheduled to report its Q1 2021 results on Tuesday, May 4. 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. 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 $113 per share, which is 24% above the current market price of around $91. Our interactive dashboard analysis on Activision Blizzard Pre-Earnings has additional details.

(1) Revenues expected to be above the consensus estimates

Trefis estimates Activision Blizzard’s Q1 2021 revenues to be around $1.90 billion, slightly above the $1.78 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, and the new generation consoles sales likely aided the software demand as well. Activision Blizzard is now focused on widening its user base from 400 million currently to over 1 billion over the next few years, by offering more free-to-play content. Activision Blizzard’s Q4 2020 sales were up 21.5% y-o-y to $2.4 billion, primarily reflecting continued growth in the Activision segment, which includes revenues from the Call of Duty franchise. 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 Q1 2021 adjusted earnings per share (EPS) is expected to be $0.75 per Trefis analysis, slightly above the consensus estimate of $0.70. The company’s adjusted net income of $590 million in Q4 2020 reflected a solid 24% rise from its $477 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 $3.75 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 24% above the current market price

Going by our Activision Blizzard’s Valuation, with an EPS estimate of $3.75 and a P/E multiple of 30x in 2021, this translates into a price of $113, which is 24% above the current market price of around $91. In fact, at the current market price of $91, ATVI stock is trading at just 24x its 2021 EPS estimate of $3.75. The 24x 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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