New Stock to watch Activation Blizzard

Stock Analysis

Activision Blizzard, Incorporated (NASDAQ: ATVI)

January 5th, 2020
Xavier Loor

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Company Overview

Activision Blizzard is an American holding company that owns and operates multiple businesses within the video game industry. The subsidiaries of the company are involved in several activities such as video game production and development, esports organization, and motion picture production. Activision Blizzard was responsible for the releases of some of the most popular, award-winning video game franchises such as World of Warcraft, Call of Duty, Diablo, and Overwatch.

Activision Blizzard is currently the largest video game company in the Americas and Europe in terms of revenue. Its stock was first made public through NASDAQ on October, 1993 at a price of USD $0.83 and was listed on the S&P 500 stock market index since August of 2015.

Industry Analysis

The global video game industry is currently valued at an estimated USD $150 billion in 2019 with forecasts predicting an annual growth rate of 9% over the next 4 years (USD $211.7 billion by 2023). The growth of the market has been attributed due to the following:

 Growing purchases for downloadable content for existing and future video games;
 Growing popularity of esports from both competitor and viewer standpoints;
 Increased viewership towards video game streams;
 Growing player base in the mobile gaming market;
 Increased revenue streams from downloadable content purchases;
 Implementations and improvements to concepts such as virtual reality and cross platform play;
 Continuous video game console innovations, developments, and upgrades;
 Increased costs of game development and higher intensity in the competitive landscape.

Some of the key players in the worldwide industry include Sony Entertainment, Microsoft, Nintendo, Ubisoft, Activision Blizzard, and Electronic Arts.

Historical Stock Value (2015-2019)

Between the years of 2015 to 2019, ATVI’s shares grew, on average, USD $8.104 or 25.75% per year (See Figure 1 and Figure 2).

Figure 1: Activision Blizzard’s Stock Graph (January 3rd, 2020)

In the September of 2018, ATVI was valued at an all-time high with USD $83,19 per share. However, a poor financial performance outlook at the time combined with lack of product releases and increased competition for active players resulted in the stock suffering a 44.88% decline to USD $45.85 per share just three months later. As of 2020, the ATVI’s value sits at an average price of USD $58 per share, a 23% increase from 2019’s opening price and a 206.88% increase from 2015’s opening price. The stock is currently sitting at some of its highest values since 2018 but has yet to fully recover from the 44.88% drop.

Trend Analysis

Since 2015, ATVI’s stock exhibits a pattern where its value grows for a number months before suffering a drop. The periods that these drops occur tend to be shorter than the periods of growth resulting in a general trend that shows a steady increase in stock price over the last 5 years (See Figure 3).

Figure 3: ATVI’s stock graph with trend lines that mark the substantial increases and decreases in price. The blue line shows the rising trend over the last 5 years.

With the exception of the large drop in 2018 (marked by the red circle in Figure 4), in nearly every major instance where the stock declined in value (marked by numbers in Figure 4), it never dropped below the price point where the instance of major growth occurred.

Figure 4: ATVI’s stock chart with trend lines that connect each major trough (lowest points).

Financial Analysis

Activision Blizzard’s annual revenue and net income in the 2018 fiscal year was reported to be all-time highs of USD $7.5 billion and USD $1.8 billion respectively (annual report was released in February, 2019). Compared to the previous year’s report, revenues grew approximately 6.88% while net income grew a massive 564.11%. The boost in net income was largely attributed to the company’s reduction in general administration and selling expenses as well as the reduction of taxes. The company’s production became more efficient considering the revenue’s growth rate was 10 times larger than the cost of revenue’s growth rate (See Figure 5).

Figure 5: Activision Blizzard Partial Income Statement (All USD $ values in thousands)

Furthermore, the company’s 2018 Operating Margin and Profit Margin were calculated to be 26.5% and 24.2% respectively. This is an improvement to the 2017 statement’s margins of 18.6% and 3.9% respectively, a direct result of the company’s change of structure to implement more efficiency and increased efforts to produce more profit per revenue dollar earned.

Recent financial reports indicate that revenues and net income for the 2019 annual statement will be lower than 2018’s report, being approximately USD $6.35 billion and USD $1.59 billion (-15% and -12.2%) but forecasts speculate a recovery where the 2020 fiscal year revenues will be USD $6.87 billion (+8.3%).

Implications/Verdict

In 2019, the company teased new entries to the Diablo (latest entry released in 2012) and Overwatch (first and only entry released in 2014) series but has not revealed a release date for either games. This, combined with new consoles that are expected to be released in late 2020 (Sony’s Playstation 5 and Microsoft’s Xbox Series X) and forecasts for value increases in the video game industry, paves the way for the stock to benefit. It should be noted that Activision Blizzard’s stock grew substantially during the years of 2005 and 2013 due to the release of new video game consoles. Therefore, it is possible that the release of the new consoles may have a more critical impact towards the stock’s value than once thought.

The company currently possesses a strong financial position. Although it is very likely that the company’s annual; revenue and net income will be lower in the 2019 fiscal year, the net income will still be much larger than 2017’s amount. As such, the stock should not be highly affected negatively by the upcoming 2019 annual report as earnings remain strong going into the 2020 fiscal year. An important note to consider is that during the 2017 fiscal year, the stock prices were slightly higher (peaking at USD $78 per share after the 2017 annual report was released in April, 2018) than they are currently despite the fact that net income was much lower during that year. The higher net income in the coming fiscal year gives a promising outlook that Activision can at least surpass the USD $65-$70 mark by the end of 2020.

Considering that the stock is currently more than 30% below its highest peak value, there is still potential for it to continue growing for the next few years. With an opening price of USD $59.42 per share in 2020, should the stock continue to follow the upward trend, it is possible for it to reach a potential 52-week high price between USD $67.52 (+$8.104 or +13.63%) and USD $74.72 (+$15.30 or +25.75%) per share.

All the factors stated indicate that Activision Blizzard’s stock is a buy at its current price as it should likely rise in 2020 and possibly early 2021 as well. Long-term holding of this stock should yield future benefits.