There are a lot of moving parts when it comes to video game company Activision Blizzard (Activision Blizzard Stock Quote, Chart, News NASDAQ:ATVI), but portfolio manager Kim Bolton says with the help of industry tailwinds and a superb crop of titles, ATVI should be on your investment radar.
Activision Blizzard has had a great year by most measures, with the stock currently sporting a 29-per-cent return for 2020 and the company coming off a solid launches of key Call of Duty games this year along with World of Warcraft: Shadowlands just releasing last week. Add to that the stay-at-home environment brought on by the pandemic and you have a rosy outlook for Activision Blizzard.
Or at least that’s how it might seem. One worry is how the stock will perform once the COVID-19 pandemic is over and people start returning to the office, leaving their game consoles behind. Meanwhile, shares of ATVI have been dropping since August, including after the company’s latest quarterly report delivered in late October. There, Activision Blizzard registered beats on both its top and bottom lines but management’s tepid guidance was apparently a cause for concern.
Activision Blizzard hit revenue of $1.77 billion, up a remarkable 46 per cent year-over-year and EPS of $0.78 per share, both edging out expectations where analysts were calling for $1.67 billion and $0.64 per share, respectively. (All figures in US dollars.)
Yet overall monthly users during ACTI’s third quarter were actually down from the previous quarter from 428 million to 390 million. And management’s outlook for the Q4 came in under analysts’ expectations at $2.00 billion and EPS of $0.44 per share.
But Bolton says the company and stock have a lot going for them, what with its raft of titles continually bringing home the bacon both on the console and mobile front.
“All the eyes have been on the new Call of Duty that came out and it was just a blockbuster, but you know, they have a great library of winners,” said Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Tuesday. “They have Call of Duty: Black Ops, they have World of Warcraft, they have Candy Crush, and all of these are tracking to generate over a billion dollars in annual bookings.”
“So, they have a great business model of recurring revenue and it’s a very high-margin business,” he said.
“We don’t own it right now,” Bolton said. “The whole area of Activision Blizzard, Electronic Arts and Take-Two Interactive have had a phenomenal run over the last little while. And so we’d look to actually get back into it.”
On the company’s 2020 so far, CEO Bobby Kotick said sales have been incredibly strong and Activision Blizzard is on track for the best performance in its history.
“We keep executing on our growth strategy, even in what are very difficult conditions for our employees,” said Kotick in conversation with CNBC’s Squawk Box on October 30. “We’re delivering great games across all of our franchises [but] what we’re really experiencing is a systemic change in the way that people think about video games. They have become a staple of entertainment but probably more importantly it’s the way that people connect and engage around the world.”
Activision Blizzard announced recently that it plans to hire more than 2,000 more employees to handle upcoming game production, a turnaround from a year ago when it laid off over 800 staff and closed European offices this year.
On management’s seemingly conservative Q4 guidance, Kotick said the uncertain economic times played a role.
“We have a lot of momentum and while there is room for substantial overperformance, we always take a cautious view when there is this much volatility and uncertainty in the world,” Kotick said. “Having said that, every one of our franchises is performing far better than expected and when I look out over the next few years, we’re one of the few companies where prioritization of opportunity is our greatest challenge. I don’t know many companies that are performing the way we are now and have the growth prospects that we do.”
Some analysts are bullish on the stock. Evercore ISI’s Benjamin Black gave an “Outperform” rating and a $110.00 target in a November 16 update to clients, pointing to medium- and long-term growth prospects underpinned by sectoral tailwinds in digital penetration and in-game sales.
Piper Sandler analyst Yung Kim kept an “Overweight” rating on ATVI in an October 30 report to clients while raising the company’s target price from $98.00 to $100.00. Jefferies analyst Alexander Giaimo kept his “Buy” rating, as well, with a maintained $105.00 target, saying in a note on October 25 to clients that Activision Blizzard’s third quarter, “looked more like a traditional ATVI beat rather than a COVID beat, as we are beginning to see gaming momentum subside a bit from peak COVID trends.”