Why You Should Love Activision Blizzard Stock
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It’s almost two years to the day since shares of video game maker Activision Blizzard (NASDAQ: ATVI) bottomed out after shedding more than 50% of their value. In what was one of the more vicious sell-offs the stock has ever seen, shares tagged an all-time high in September 2018 before embarking on a six-month-long drop that must have had shareholders very nervous.
But once the selling ran out of steam, business was quickly back to usual which meant a rallying share price and it’s been much of the same since. Even the COVID pandemic which gave markets their biggest rattle since 2008 barely troubled them. Indeed, in many ways it could be said the pandemic was the makings of the current Activision as it has sent their shares to fresh highs after fresh highs for much of the past year.
With more people than ever before living under lockdowns, many turned to video games for entertainment. Activision made the most of it and their shares are up more than 120% in the past two years and close to 50% in the past year alone. Even as economies reopen, it looks like these new gamers are going to stick around for a time yet and Wall Street hasn’t been slow about backing Activision to continue performing just as strongly.
On Monday evening, investors and Wall Street alike got a look at their latest earnings report which confirmed as much. Revenue was up a solid 36% on the year and well ahead of analyst expectations, as was bottom line EPS. They added a fresh 38 million users to their books which helped spur management into raising their forward guidance for the year. Video games of 2021 are very different to the video games of 2001. Those of us who cut our teeth with the latter were used to making a simple one-time purchase for a game’s disc, but the gaming model has shifted now to continual online in-game spending incentives within a single game that drastically increase a customer’s potential lifetime value.
On that front, Activision’s in-game net bookings jumped to $1.34 billion from $0.96 billion a year ago and that trend is set to continue into the second half of the year. Bobby Kotick, CEO of Activision, spoke to “that relentless drive across our franchises which produced strong first-quarter results that were well ahead of expectations.” He expects this “continued overperformance” to drive a much better than expected outlook for the year.
This overperformance will come as no surprise to investors already involved, and should be the final confirmation that the rest of us are waiting for to jump in. Recent months and weeks have seen consistent upgrades from sell-side analysts as Activision’s outlook has gone from strength to strength.
Morgan Stanley reaffirmed their Overweight rating on the stock on Monday before results were even released. Their $115 price target suggests there’s upside of close to 30% to be had from current levels. Jefferies was out with a $120 price target late last month and pointed to how the company is sporting "best-in-class" intellectual property that should help them capture market share and boost audience and product longevity.
From a higher-level perspective, Jefferies also came out strong on the video game industry overall. Andrew Uerkwitz and his team of analysts wrote in a note to clients that "videogames are as popular as ever. We don't see that changing any time soon; we expect the $175B industry to continue to grow at double digits for the next five years. And almost as important: Despite fears that a reopened economy marks the end of the stay-at-home trade, Jefferies expects big publishers will remain "robust."
There’s not much more the individual investor should need to hear when it comes to making a decision to buy or pass. We’re talking about an industry that’s been catapulted to heights it was probably going to take years getting to, and a company that’s shown it’s able to lead from the front. The recent weakness in tech that has filtered through to Activision and its peers should be seen as a gift of a buying opportunity.
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