- Despite being bombarded by negative catalysts, Activision Blizzard continues to have a positive outlook from analysts.
- Its efforts to increase revenue from its mobile platform position the company well to capitalize on the growing mobile game market.
- It benefits from its strong balance sheet and growing projected free cash flow, which can be reasons for shareholder value improvement.
- ATVI enjoys positive insider trading and is trading cheaply at 19.74x earnings.
Activision Blizzard (NASDAQ:NASDAQ:ATVI) is one of the world's largest video game publishers operating in America, EMEA, and Asia Pacific. It has been in the industry for over 40 years and has a portfolio of popular franchises such as Call of Duty, Diablo, World of Warcraft, Hearthstone and Candy Crush. Following a devastating lawsuit filed against ATVI in July 2020 and the subsequent involvement of its CEO in such controversies, the company stumbled and lost some of its staff and key employees, delaying the release of Overwatch 2 and Diablo IV. The company also lost significant sponsorships, all of which contributed to the spike in downward revisions to its top line and earnings per share. All of these factors contributed to the loss of confidence in its current CEO's leadership, instilling noise and fear in the market, resulting in a sharp decline wiping out 45 percent from its last year's highs. Considering ATVI's current risk/reward ratio, the recent drop in its price unlocks a good opportunity for a potential pullback opportunity.
Staff Revolting and Leaving, Lost Sponsorships and a Mountain of Lawsuits
There are many more known facts to mention why ATVI dropped massively for the over the last few months. To name a few, the problem about its workforce and missed sponsorships with big companies like Coca-Cola (NYSE:KO) and T-Mobile (NASDAQ:TMUS), which affected mostly it's Blizzard Entertainment segment. In addition to the loss of its Overwatch League sponsorship, two of ATVI's key employees responsible for Diablo 4 and one World of Warcraft designer have confirmed their departure from the company. To summarize, the majority of the negative news against ATVI has a significant impact on its Blizzard Entertainment segment, which generates the least revenue at 26.2 percent.
In my opinion, the market punished ATVI too harshly. As one of the well established companies in its market, it is too pessimistic to think that ATVI cannot handle the reshuffling of its current workforce. However, despite the mountains of lawsuits and negative sentiments, most analysts have a bright forecast for ATVI's top line, as can be seen in the image below:
Source 1: TradingView
It remains above last year's figure of $8,086 million when compared to its current 2021 consensus, despite the spike in its downward revision due to the aforementioned controversies. There are still a few positive catalysts about its Blizzard Entertainment segment like a huge update for their Hearthstone game, which may become a hit in 2022 for its bigger E-sport prize pool of $3 million.
Improving Revenue From Mobile Games
Unlike consoles, which restrict the gamer's ability to use it wherever they please, mobile games benefit from the potential ease of being used anywhere as the economy continues to attempt a successful reopening, transitioning work from home to the traditional workplace settings. Revenue from mobile games is expected to reach $116.4 billion in 2024, growing at an 11.2 percent compound annual growth rate from 2019.
Source 2: Statista
One value-adding catalyst of ATVI is its growth in mobile games revenue as shown in the image below.
Source 3: Company Filings, Prepared by the Author, Amounts in millions
The management pointed out the following improvements and what investors should expect with their mobile game:
On mobile, Call of Duty net bookings grew over 40% year-over-year in the third quarter, driven by double-digit growth in the west, and it continued contribution from the game in China.
The team continues to refine the player experience, building on learnings from the title's first 2 years to optimize content, events, and features for our communities around the world. And at the same time, we continue to ramp our teams working on new mobile title within the Call of Duty universe.
ATVI also acquired Digital Legends, a mobile game developer, and hired developers to further improve its COD Mobile. According to the management, they are also in the progress of releasing Diablo Immortal, a mobile version of Diablo, to the public in H1 2022.
More Fear, More Upside Potential
Source 4: Prepared by the Author
Following a precipitous decline in its price, ATVI improved its short interest relative to October 2021 and improved potential upside based on today's price. ATVI's investors have a 35 percent upside potential, as indicated by the average of DCF and simple relative valuation models in the chart above.
Source: Prepared by the Author
I completed the five-year DCF model with the assistance of analyst estimates; the total revenue of $8,750 million is slightly higher than what management anticipates. In my opinion, it remains achievable as the company has already surpassed it with its TTM revenue of $9,052 million, which is an all-time record.
I also expect that its operating income will continue to grow to 37.6 percent by the end of the model as the company continues to restructure its workforce, converting contractual workers into full-time employees.
Source 5: Seeking Alpha and Yahoo Finance, Prepared by the Author
Above are my assumptions and WACC calculations and as well as its selected 5 year historical data which helped me to complete my DCF model.
Clearer Sign of Potential Bottom, Pullback
Source 6: TradingView
ATVI currently pivoted at $57 level, providing early signs of bullish price action and preparing to attempt breaking its monthly trend line resistance as demonstrated in the chart above. There is a huge gap clearly visible in its daily timeframe that may drag the price down lower that may draw a potential double bottom in the coming weeks. Strong catalysts like an update about the release of its Diablo IV and Overwatch 2 can help the stock eliminate today's bearish price action. Currently, its MACD indicator crossed already, suggesting a bullish price action in the coming trading weeks. Consolidation above its current 52 week low will provide investors a better pullback opportunity set-up.
ATVI also benefits from positive insider buying from its Director, as illustrated in the chart below, which has an average cost of $87 per share starting from its May acquisitions.
Source 7: Finviz
On top of the positive insider trading, the management is paying only $18 million as part of its agreement with the Equal Opportunity Commission to compensate the aggravated parties due to the controversies, which is not that material compared to what the company earns. Investigating ATVI's balance sheet brings more positive outlook for the company. Its current ratio generated an all-time record of 5.56x without deteriorating its debt/equity ratio of 0.21x, better than its 5 year average of 0.33x. With no significant long-term debt maturing before 2026 and growing projected free cash flow, it is likely that investors will see an increase in share repurchases or dividend payments in the coming quarter, making this a stock worth monitoring.
Thank you for reading!
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ATVI over 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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