Atvi (Best Video Game stock out there)
When we think of leisure activities done online in our spare time, chances are that most of us think of video games. And, that phenomenon, pushed by the pandemic, is why I think that one of the biggest game developers (with some of the most beloved games) is one of the most undervalued digital plays on the market.
Activision Blizzard is responsible for some of the biggest games out there:
Call Of Duty
Overwatch
World Of Warcraft
Hearthstone
Candy Crush
All of these beloved properties lead to great diversification & a basic guarantee that they will capture a part of any growth in the gaming market. They also lead to serious monetization & industry-leading profit margins.
2020 was a transformative year for the company and has unlocked the full potential of its assets. During the pandemic they increased revenue by 25% to over 8 Billion, and through key release like COD Warzone, the company has seriously boosted its in-game & online content sales, to now making up half of net bookings - this is a very promising sign since these are higher margin services & show that they can now better monetize their initial purchase users over a much longer timeframe. This trend is echoed in its mobile segment (primarily Candy Crush), which despite declining MAU’s, has tripled its ARPU and is thus driving strong profitability contributions.
The video game industry is now on a tear, with millions of new gamers having tried ATVI’s games for the first time (having been stuck at home), with most of these players likely to stay - along with a digital future that is leading to even more video game adoption from society in general - a trend that Activision is set to eclipse with new releases (like Diablo 4 & Overwatch 2) and its best-in class portfolio of games. In addition to the demand surges, the industry consistently drives market leading profitability & balance sheet metrics.
These macro factors are made all the more attractive by its relative undervaluation to the industry, something that was only amplified by the 15% share price drop on the back of its most recent earnings report. The massive sell-off is a substantial buying opportunity. Activision & King beat management forecasts (with Activision up to 119 million players vs 111 million & King continuing its monetization march through new initiatives like competitive play in the flagship Candy Crush). Blizzard, unfortunately, continued its laggard status with continued weakness in its platforms, though they did show surprising resilience and a stabilization of users at 26-27 million. The remastered Diablo game performed exceptionally well, and bodes well for Diablo IV. Unfortunately, in relation to its legal & social claims, it was forced to fire key players, and delay the release of Overwatch 2, and Diablo IV, the greatly anticipated sequels that were supposed to revitalize the weakened Blizzard segment.
Luckily for investors, while incredibly disappointing on a short-term basis, analysts and the investment community at large seem to have seriously underestimated the long-term impacts of this news & seriously undervalued the company in response. Their new forecasts of basically 0 profitability improvement next year, and sub-5% sales growth, seemingly justify the massive share-price devaluation. Luckily, the new COD Vanguard series is continuing to exhibit strength, and the long-term demand for the new releases is still there, with 2023 set up to be a breakout year for the company - as new releases come and the HR issues start to be behind them.
All of this has exacerbated its discount to its competitors in the video-game space:
Activision boasts a 17 f p/e on the back of recent revision down on next-year earnings without the new releases (any growth above 5% of eps without the new releases next year would change the dynamic surrounding the stock). Including the net cash on the balance sheet, the EV (Enterprise Value)/earnings ratio is under 15.
In comparison, EA, which is forecasting next year growth of <7% in sales, is trading for a 22 fp/e & a 22 EV multiple, owing to its inferior balance sheet.
Take-two, is growing at an estimated 15% next year, after a negative growth year in 2021. This goes for almost 40 f p/e, and around 36 at EV.
Overall, ATVI is a beleaguered company that has been crushed by 2022 concerns & what essentially amounts to an HR issue, and an HR issue that they are addressing. Any sort of 2022 outperformance would completely change the sentiment surrounding the company, and the coming pent-up demand for 2023 should lead to a breakout year despite it all. At only 15 times EV/forwards earnings, the long-term risk-reward principles seem out of sync. In the short term, the stock might languish in the $65 range but for a 3-year horizon this seems like a best-in-class company that you can buy at a discount.
By: Mateo Gjinali
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