Up 10% In A Month, Does Activision Blizzard Stock Have More Upside?

According to a media report, Microsoft’s proposed acquisition of Activision Blizzard (NASDAQ: ATVI) is likely to secure an EU nod. ^[1] Since its announcement early last year, the proposed deal has faced regulatory hurdles in the U.S., Europe, and the U.K. Late last year, the U.S. FTC asked a judge to block Microsoft’s proposed acquisition stating that it would hurt competition in the gaming industry. However, Microsoft has been willing to give concessions. It has already reached an agreement with Nintendo and Nvidia to offer Call of Duty on their platform for the next decade, and it has offered a similar deal to Sony. Microsoft has stated that it is confident in its case and expects the deal to go through. While it is willing to address antitrust concerns by offering licensing deals to rivals, it will not sell the Call of Duty franchise.

We maintain our view that Activision Blizzard is poised for growth, irrespective of the deal status. The company is home to some of the largest franchises, including Call of Duty and Candy Crush. Activision’s Q4 2022 results, announced last month, were better than street estimates, and 2023 will likely be a solid year for the company. It reported net bookings of $3.6 billion, reflecting a solid 43% y-o-y growth. The company benefited from its key franchises, including Call of Duty, Warfare, Overwatch, and Candy Crush. The company’s total monthly active users (MAUs) rose to 389 million by the end of 2022, compared to 371 million in Dec 2021. Activision Blizzard will launch its Diablo IV title in June 2023, which will likely drive the company’s top-line growth next year. We forecast the company’s bookings to be around $9.5 billion in 2023, reflecting a 12% y-o-y growth. Its operating margin contracted over 650 bps in 2022 amid higher costs, but it will likely see a rebound next year. Our Activision Blizzard Operating Income Comparison dashboard has more details. The company’s balance sheet is also robust, with a 6% debt as a percentage of equity and 26% cash as a percentage of assets.

We estimate Activision Blizzard’s Valuation to be $91 per share, about 14% above its current market price of $79. ATVI stock has seen a rise of 11% in a month, while it’s up around 4% year-to-date. However, it remains below the $95 price offered by Microsoft. At its current levels, ATVI stock is trading at 20x its 2023 earnings estimate of $3.94, compared to the last three-year average of 23x, implying that it has more room for growth. Overall, any dip in ATVI stock from here can be used as a buying opportunity for long-term gains.

While ATVI stock has more room for growth, it is helpful to see how Activision Blizzard’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis 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 Take-Two Interactive vs. Fair Issac.

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[1] Month-to-date and year-to-date as of 3/6/2023
[2] Cumulative total returns since the end of 2016

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1. Exclusive: Microsoft set to win EU nod on Activision with licensing offer, sources say, Foo Yun Chee, Reuters, Mar 3, 2023 [↩]