Activision Blizzard (NASDAQ:ATVI) is an excellent combination of good value and strong growth tech stock. Activision will benefit from the launch of three of the most anticipated titles before the holiday shopping season while expecting less competition after rivals delayed their products. ATVI's stock has surged strongly since the start of 2013, gaining an impressive 117%. Nevertheless, in my opinion, ATVI's stock still has plenty of room to move up. Moreover, Activision has been able to show an earnings per share surprise in each one of the last four quarters.
According to the company, Activision Blizzard is the world's largest and most profitable independent interactive entertainment publishing company. It develops and publishes some of the most successful and beloved entertainment franchises in any medium, including Call of Duty, World of Warcraft, Skylanders, and Diablo. Headquartered in Santa Monica California, it maintains operations throughout the United States, Europe, and Asia. Activision Blizzard develops and publishes games on all leading interactive platforms and its games are available in most countries around the world.
Source: Slide Presentation
The table below presents the valuation metrics of ATVI, the data were taken from Yahoo Finance and finviz.com.
Activision's valuation metrics are very good; the forward P/E is at 15.98, the PEG ratio is low at 1.05, and the average annual earnings growth estimates for the next five years is very high at 16.62%.
Latest Quarter Results
On August 05, Activision Blizzard reported its second-quarter 2014 financial results, which beat EPS expectations by $0.04 (200%) and beat on revenue.
The company announced better-than-expected financial results for the second quarter of 2014:
The company raised its full-year forecast, projecting profit, excluding items, of $1.29 a share, and revenue of $4.7 billion. Activision previously estimated $4.68 billion in sales and profit of $1.27 a share. Analysts see $1.31 a share, with revenue of $4.71 billion.
In the report, Bobby Kotick, Chief Executive Officer of Activision Blizzard, said:
Our better-than expected performance was driven by continued strong digital sales from Blizzard Entertainment's World of Warcraft, Diablo III: Reaper of Souls and Blizzard Entertainment's newest franchise, Hearthstone: Heroes of Warcraft, which recently launched on the iPad and continues to be well received by audiences around the world, as well as digital sales from Activision Publishing's Call of Duty. Based on our results, we are raising our full-year outlook and we expect to grow our non-GAAP revenues year-over-year and deliver record non-GAAP earnings per share for the full year.
Dividend and Share Repurchase
Activision has been paying dividends since 2010. The forward annual dividend yield is at 0.87% and the payout ratio is only 20.8%. The annual rate of dividend growth over the past three years was at 8.2%.
Source: Charles Schwab
Since the company generates lots of cash, and the payout ratio is very low, there is a good chance that the company will continue to raise its dividend payment.
Management currently has no share repurchase authority and is focused on debt repayment.
A comparison of key fundamental data between Activision and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
ATVI has the highest gross and operating margins among the stocks in the group. However, its PEG ratio is higher than that of EA and TTWO.
The charts below give some technical analysis information.
The ATVI stock price is 0.55% above its 20-day simple moving average, 2.50% above its 50-day simple moving average and 16.91% above its 200-day simple moving average. That indicates a short-term, mid-term and a long-term strong uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.0333 and descending, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 66.11 near overbought conditions.
According to Portfolio123's "ValueSheet" powerful ranking system, ATVI's stock is ranked first among all Russell 1000 tech stocks. The "ValueSheet" ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, asset utilization, technical rank, industry rank, and industry leadership, as shown in Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
Many analysts are covering the stock, and all of them recommend it (a rare situation). Among the Twenty-five analysts, nine rate it as a Strong Buy, and sixteen analysts rate it as a Buy.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering ATVI stock, there are fourteen analysts who have the four or five star rating, all of them recommend the stock.
On August 13, Benchmark Co. analyst Michael Hickey recommended buying Activision stock. Mr. Hickey is forecasting 2014 unit sales of 19 million for Call of Duty: Advanced Warfare. The analyst raised his projection for Destiny to 10 million copies from 8 million, citing the competitors' delays.
According to Activision, this September, October and November, it is releasing three of the most talked about games in the industry, and perhaps its best slate ever. Destiny is the most pre-ordered new IP in history. Skylanders Trap Team is yet another breakthrough innovation for the biggest kids' video game in the world. And Call of Duty: Advanced Warfare is a creative leap forward for the biggest franchise in the industry. Meanwhile, according to Bloomberg, Activision rivals Electronic Arts (NASDAQ:EA) and Take-Two Interactive Software (NASDAQ:TTWO) pushed back competing titles to 2015 because their games need more work. Worldwide sales of games for consoles are forecast to grow 7 percent to $27 billion this year, according to PricewaterhouseCoopers LLP, fueled by demand from consumers who've bought the new PlayStation 4 from Sony Corp. or Microsoft Corp. (NASDAQ:MSFT)'s Xbox One. That will mark the first annual growth for game makers since 2008, according to PwC.
These are great news for Activision, which is heading into the holiday shopping season with three of the most anticipated titles, while expecting less competition after rivals delayed their products.
Activision Blizzard has been able to show an earnings per share surprise in each one of the last four quarters, as shown in the table below.
In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter demonstrates the strength of its business, and there is a good chance that Activision Blizzard will continue to surprise by reporting better than estimate results also in the future.
ATVI's stock has significantly outperformed the market this year and in 2013. Since the start of the year, ATVI's stock has gained 29.1% while the S&P 500 index has risen 7.2%, and the Nasdaq Composite Index has increased 8.4%. Moreover, since the beginning of 2013 ATVI's stock has recorded an impressive gain of 116.7%, while the S&P 500 index has increased 38.9%, and the Nasdaq Composite Index has risen 49.9%. Nevertheless, considering its good valuation metrics and strong earnings growth prospects, the stock, in my opinion, is not expensive.
Activision Blizzard will benefit from the launch of three of the most anticipated titles before the holiday shopping season, while expecting less competition after rivals delayed their products. Activision has very good valuation metrics and strong earnings growth prospects. Moreover, ATVI's stock is ranked first among all Russell 1000 tech stocks, according to Portfolio123's "ValueSheet" powerful ranking system. In addition, Activision has been able to show an earnings per share surprise in each one of the last four quarters. All these factors lead me to the conclusion that ATVI stock is a smart investment right now.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.