Activision Blizzard: Branded Franchises In A Growing Sector

| About: Activision Blizzard, (ATVI)

Summary

Investors' chance to own popular brands in video gaming.

Strong cash flows create an attractive investment candidate.

Debt levels are well within reason, and the company is well positioned to continue successfully.

In this article, we're going to review a strong performer in the video game industry whose stock price has more than tripled in the time period since 2012 end.

atvi price stock to buy?

(Source: Faloh Investment)

This is Activision Blizzard Inc. (NASDAQ:ATVI), which controls several popular brands in an industry experiencing secular growth.

Activision Blizzard Stock Valuation

After including a few "steadying" assumptions (which we'll touch on in the following segments), the DCF Model showed up these facts:

atvi dcf model stock broker

(Source: Faloh Investment)

Overall, ATVI landed a fair value of $27.83 per share. Companies earning similar amounts of free cash flow are on the market for prices of 12x through 25x, so a fair trading range for the company appears to be $24.09-50.19.

A company tends to hit the upper or lower part of its estimated free trading range during any five-year period depending on the general market's trading range, the timings of the company's internal business cycles, and the results of its operating performance.

In the next segment, we'll take a look at the stock charts.

Free Cash Flow Chart

ATVI's price, free cash flow, and price-to-free cash flow are included:

FCF valuation

(Source: Faloh Investment)

From this chart's orange line, I see the free cash flow generated by ATVI has been overall positive. Interestingly, the company's share price has had at least four 1-3 year rallies, which resulted in the share price tripling or better! This is the price action of a coiling spring.

Balance Sheet

ATVI's cash balance of $4 billion and other minor receivables give the company a healthy current ratio of 1.43. Liquidity at the company is generally healthy, counting on its present assets and creditworthiness.

Long-term debt is easy with ATVI. The hefty $4.5 billion in long-term debt assumed around the time of Activision's merger with Blizzard is easily funded by free cash flows, which have exceeded $850 million in the trailing four years' time. Overall, the company seems to generate plenty of cash to budget for the ongoing operations.

Expert Summary

ATVI has delivered strong returns to shareholders throughout its history. Practically everyone who's held the stock for at least five years has doubled their money on the investment. The company develops and monetizes a collection of strong franchises in the gaming world.

Its recent all-time highs as regards free cash flow generation are largely attributable to earnings associated with the launch of a new franchise (encompassed by the release of the game Overwatch). I anticipate fewer major launches on the immediate horizon, and for the free cash flow figure to retreat downward.

The Overwatch franchise will continue to contribute regular free cash flow to ATVI by producing new characters and merchandise. So, I believe the free cash flow generated by the company will resettle at a somewhat higher level than it previously sustained for the trailing 5-year period.

Takeaway

ATVI is a leading video game producer in the PC and console markets. The Blizzard arm created the hit franchises StarCraft, Warcraft, and Diablo during the '90s. Each of these major franchises survives today through more recent releases. The company has interests in selling video games, selling in-game, customizable merchandise, and licensing merchandise such as action figures.

The company's fixed costs are mostly in the form of salary, office space, and data centers. Because of low fixed capital costs, ATVI has pretty good operating leverage so long as it continues to keep salary costs in line with value creation.

While we return to the DCF Model's result, I will summarize my outlook for ATVI:

dcf model stocks to buy

(Source: Faloh Investment)

Greater than 5% free cash flow growth has been a long-term trend for the company, so I chose to project 5% annual growth as a conservative baseline. It's a big help to growth that ATVI owns multiple strong franchises.

Being a software developer, the company's operations span the globe. It has the option of growing into emerging markets the world over when opportunities appear. ATVI enjoys great popularity in China, Japan, and South Korea.

Ultimately, I believe the stock will trade toward the higher part of its range. The video game industry is growing, and the company is well positioned to continue enjoying success in the marketplace.

5-Year Price Target: $50.19, a 5-year CAGR of 7% from the trading price of $36.34.

Disclaimer: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author's interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security.

Please click the + icon next to my user name and follow me, Faloh Investment, as I work to keep you informed on further developments as the market continues to present major value opportunities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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