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Activision Blizzard Stock’s Rebound Will Run Out of Steam

Ian Bezek

Gaming stocks are finally showing a little life again. After a dreadful couple of quarters, the gaming names have started to recover from their worst levels. Activision Blizzard (NASDAQ:ATVI) stock, in particular, is back to the $56 range after reaching $40 earlier this year.

Activision Blizzard Stock's Rebound Will Run Out of Steam

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Is the optimism justified? Some analysts and traders are excited to see Activision Blizzard stock benefiting from product launches and events that will build engagement with the company’s audience. Other observers, however, see Activision as a floundering company that has not achieved much in the way of long-term strategic goals.

Which of these viewpoints will play out for ATVI stock over the next year?

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Dueling Analysts

Analysts have taken opposite stances on ATVI stock so far this month. Stifel just raised its price target for Activision Blizzard stock from $57 to $65 last week. It did this because the company had poor sales figures last year. This, in turn, sets up strong comparisons for Activision going forward. Stifel noted the upcoming release of the next “Call of Duty” game along with the BlizzCon event as positive catalysts to help give the ATVI stock price a boost.

While Stifel sees a clear path of short-term upside for Activision Blizzard stock, Cowen’s Doug Creutz disagrees. He says that potential BlizzCon buzz is already priced into ATVI stock, given the recent run in Activision’s share price. Meanwhile, Creutz put a damper on the “World of Warcraft Classic” excitement, saying that the enthusiasm will be difficult to monetize.

Creutz values ATVI stock at just $48 per share. That’d be 15% downside from the current share price. He says that while Activision has some interesting opportunities coming up, the company has a lot to prove, given its poor organic growth performance over the past decade.

Is Activision’s Long-Term Strategy Working?

As Creutz noted, Activision Blizzard stock has not been a great long-term performer. That’s in part because management hasn’t fully adapted to today’s changing gaming landscape. They have made some reasonable moves, such as acquiring the King studio for mobile gaming.

Overall, however, it seems they are a little short in terms of innovation. With “Call of Duty,” for example, how long will they keep going with the one release a year model that doesn’t change up the formula too much? “Call of Duty” sales have been declining in recent years — there’s only so much you can get from a brand before people tire of it.

More broadly, Activision still relies heavily on single-time game purchases, which goes against the grain. Investors want more subscription or downloadable content recurring revenue streams. It’s achieved those more favorable revenue splits within the Blizzard and King divisions. Unfortunately, those are not where Activision’s blockbuster new games are coming from, and within that category, rivals like “Fortnite” continue to outshine Activision’s content.


Activision Blizzard Stock Valuation

On the one hand, you can certainly defend Activision’s financial performance in recent years. Revenues, for example, are up from $4.6 billion in 2013 to $7.1 billion in the most recent year. Even accounting for the King acquisition, Activision has certainly been able to expand its overall business. The company hasn’t let the growth of the gaming industry completely pass it by. Rivals like EA (NASDAQ:EA) and Take-Two (NASDAQ:TTWO) have outperformed ATVI stock, however.

Activision’s skeptics, however, would note that annual operating income is only up from $1.5 billion to $2 billion over the same stretch. Ideally, you’d expect more of that revenue growth to filter down to the bottom line. That’s because digital transactions, subscriptions and micro-transactions/DLC content were all supposed to boost profit margins. Yet, Activision hasn’t seen margins really explode as it has scaled up.

In any case, Activision Blizzard stock is currently trading for 26x trailing earnings. That’s not cheap, particularly for a hit-centered business. As Activision moves more to recurring revenues, it should be able to sustain a higher valuation ratio. Still, 26x earnings is quite steep. Analysts have forward earnings at a consensus 22.5x, which is much more reasonable.

But those forward earnings estimates, in turn, require upcoming game launches to deliver on expectations. InvestorPlace’s Luke Lango makes a solid argument for how Activision could have a stellar 2020. However, management will have execute before the market is going to reward Activision Blizzard stock with a much higher share price.

My Verdict on ATVI Stock

If you bought Activision Blizzard stock in 2017 or 2018, you might be tempted to argue that ATVI stock is still cheap here. After all, it hit $85 last year, so $56 must be a deal, right?

But I don’t think it’s that simple. Activision, and the rest of the gaming stocks, got wildly overvalued last year. The sector faced reality earlier this year, with ATVI stock bottoming at $40. Since then, shares have rebounded more than 30% off the lows. That’s plenty of upside, given the company’s uncertain operating performance. Don’t let the discount to last year’s share price fool you. At 26x earnings, Activision Blizzard stock still comes with plenty of risk.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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