Beware of Valuation Risks on Activision Blizzard, Inc. Stock
Video game publisher Activision Blizzard, Inc. (NASDAQ:ATVI) is a really good company. And that will remain true into the foreseeable future. Between the mainstream emergence of Overwatch League (OWL) and continued success in its Call Of Duty franchise, Activision will remain a dominant player in the growing video game industry for many years to come.
But the same can’t be said for Activision stock.
Over the past five years, Activision stock has grown by nearly five-fold in value from $15 to over $70. The big drivers have been the continued success of the company’s staple franchise as well as a build-out of multiple cross-selling opportunities, namely in-game content and micro-transactions.
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These drivers will persist into the foreseeable future. And the ATVI growth story will also get a bump from eSports, as OWL promises to be the beginning of something much bigger.
But Activision stock is already priced for this, and more.
That is why I’m avoiding the stock. The hype sounds good. But the numbers don’t support further upside.
Activision Stock Numbers Don’t Add Up
Activision is set to experience solid growth over the next five-plus years.
The company’s big video game franchises (Call of Duty, World of Warcraft, Overwatch, etc) are all doing well, and have been doing well for some time. There aren’t any signs that demand for these video game franchises will wane any time soon. In fact, demand could pick up as virtual and augmented reality technologies start to become the norm in the video game world.
Moreover, ATVI is raking in more money than ever out of its customers, thanks to micro-transactions. This trend is also showing no signs of slowing down.
And the biggest catalyst for ATVI going forward is the company’s massive push into eSports through OWL. OWL is the first of its kind — an eSports league that has city-based teams, a fully fleshed out website, and millions of fans. Many more leagues like this will emerge over the next several years, and ATVI will be behind a good number of them. As these eSports leagues start to look more like a mini-NBA or mini-NFL, more and more advertising dollars will flow into Activision’s pockets.
All together, the growth narrative for ATVI looks pretty solid for the next five-plus years.
Activision Stock Priced for Big Growth
But Activision stock is already priced for this big growth, and more.
Over the next five years, earnings growth is expected to be around 16% per year. That is roughly equivalent to where it’s been over the past five years. Earnings have grown roughly 15% per year from $1.11 in 2012 to $2.21 in 2017. In other words, earnings growth is expected to look largely the same over the next five years as it has over the past five years.
But ATVI stock is currently trading at a valuation that it hasn’t ever seen before. The current forward earnings multiple on ATVI stock is 28. The average forward earnings multiple on ATVI stock over the past five years is below 20.
In other words, despite there being essentially zero change in the growth profile, ATVI stock currently trades at more than a 40% premium to its historic average valuation.
That doesn’t make any sense. It shows just how giddy investors are about eSports and the video game industry at large. But that giddiness isn’t supported by numbers. And at the end of the day, the numbers need to support Activision stock.
Bottom Line on Activision Stock
I understand all the hype surrounding micro-transactions, augmented and virtual reality, and eSports. I’m bullish on all three segments over the next five-plus years.
But I’m not bullish on Activision stock because it feels like upside from those growth engines is already largely priced in.
As such, I’m waiting for a big dip to buy into ATVI stock. The secular nature of the company’s growth narrative makes this a name to own. But only at the right price. And the right price isn’t $70 and up.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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