U.S. Markets close in 1 hr 44 mins

Activision Blizzard Still Has Room to Run Higher

- By Harsh Jain

Activision Blizzard Inc. (ATVI) rewarded shareholders with marvelous returns in 2017 as the stock surged more than 75%.

The company's gains were driven by a series of robust quarterly earnings as well as strong performances from its main franchises. The video game company has been on an impressive winning streak, so it is well positioned to continue growing in the years ahead due to industry tailwinds and competitive advantages.

Shares of Activision Blizzard jumped approximately 5% after the video game publisher reported impressive fourth-quarter results on Feb. 8. For the quarter, revenue grew almost 8% to $2.64 billion, surpassing analyst estimates by $90 million. Earnings per share came in at 94 cents, again beating the consensus.

The company's performance was driven primarily by the successful launch of "Call of Duty: World War II." The video game publisher also benefited from strong sales of "Destiny 2," which outshined its predecessor.

Last but not the least, "Crash Bandicoot" became the most successful remake for the PlayStation 4. The company's operating income escalated 32% year over year.

Revenue generated from the King segment was $516 million, $8 million more than expected. The segment's monthly active users (MAU), however, fell 1% quarter over quarter to 290 million. Activision had 55 million users, representing a surge of 12% quarter over quarter.

The company recently increased its dividend to 34 cents per share, a 13% increase from last year. The company now has free cash flow of almost $1.10 billion, which will help it to continue paying a dividend as well as invest in growth opportunities.

Apart from developing games, Activision is aggressively pursuing other businesses in order to diversify its revenue stream. The company is focusing on in-game advertising, eSports and consumer products as it believes these strategic growth areas will help it to thrive in the coming years.

Summing up

Gaming stocks have had a tremendous run over the past couple years, and Activision Blizzard is one of the best gaming stocks available on the market. Despite publishing comparatively fewer new games than last year, the company has continued to deliver record results.

The company's forward dividend yield currently sits at 1.79% with a payout ratio of just 21%. This clearly suggests it has plenty of rooms to grow its dividend in the years ahead. The company is still working on its growth initiatives, which might hurt its bottom line in the near term, but will indeed pay off in the coming years.

Although the stock climbed sharply in 2017, it still has room to run higher. The stock currently trades at a price-earnings ratio of 44 times, suggesting it is somewhat expensive. However, considering Activision's growth prospects, it looks justifiable.

As a result, long-term shareholders looking to initiate a position in the stock should consider buying at the current market price as it is down nearly 8% from its 52-week high.

Disclosure : No positions in the stocks mentioned in this article.

This article first appeared on GuruFocus.