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Estimating The Fair Value Of Activision Blizzard, Inc. (NASDAQ:ATVI)

Chris Amalia

Does the January share price for Activision Blizzard, Inc. (NASDAQ:ATVI) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Activision Blizzard by following the link below.

Check out our latest analysis for Activision Blizzard

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $2.14k $2.67k $3.24k $2.94k $3.09k
Source Analyst x15 Analyst x10 Analyst x3 Analyst x2 Analyst x2
Present Value Discounted @ 10.6% $1.93k $2.18k $2.40k $1.97k $1.87k

Present Value of 5-year Cash Flow (PVCF)= US$10b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 10.6%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$3.1b × (1 + 2.9%) ÷ (10.6% – 2.9%) = US$42b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$42b ÷ ( 1 + 10.6%)5 = US$25b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$36b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $46.55. Compared to the current share price of $48.5, the stock is fair value, maybe slightly overvalued at the time of writing.

NasdaqGS:ATVI Intrinsic Value Export January 8th 19

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Activision Blizzard as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.6%, which is based on a levered beta of 1.085. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For ATVI, I’ve put together three important aspects you should look at:

  1. Financial Health: Does ATVI have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does ATVI’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ATVI? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.