Activision Blizzard has really strong fundamentals, this portfolio manager says

If it can ever get past the current controversy surrounding its alleged toxic workplace, US video game developer Activision Blizzard (Activision Blizzard, Stock Quote, Charts, News, Analysts, Financials NASDAQ:ATVI) should be a good buy, says Kim Bolton of investment management firm Black Swan Dexteritas.

“We did own it. We got out and then we’re back in here right around the $80 level,” says Bolton, speaking about Activision Blizzard on BNN Bloomberg on Thursday. “I do it in tranches: I’d buy some here, add to it down at $70 to $65 and then down to $57.”

“The main reason it’s been on the hard times is, is because of those terrible press releases that came out about the toxic work environment and the CEO was getting paid exorbitant amounts, and it just dragged on the stock. But, you know, the fundamentals remain otherwise very, very strong,” Bolton said.

The news broke in late July that the California Department of Fair Employment and Housing was suing Activision Blizzard over the so-called frat boy culture at its workplace which the lawsuit contended was a “breeding ground for harassment and discrimination against women.” 

The initial response by management was to deny the lawsuit as “meritless and irresponsible,” a move which promptly resulted in a walkout by hundreds of employees and an open letter from past and current employees attesting to the suit’s claims and their now-low level of trust in the company’s leaders. From there, the company responded with its president and human resources head stepping down and the hiring of a third-party law firm to conduct a review of Activision Blizzard’s policies and procedures. 

What’s more, ATVI shareholders have launched their own lawsuit against the company, claiming management initially hid the Department of Fair Employment and Housing’s sexual harassment suit and claiming that shareholders have been “economically damaged” as a result and that the DFEH suit made evident that certain statements in the company’s quarterly reports were false.

The consequence for the company’s share price was a nosedive from around $90 per share before the California suit was made public to where the stock now sits in sub-$80 territory. 

Like most of the video game companies, ATVI had done well over the COVID-19 pandemic, as the stay-at-home work environment was more conducive to buying more games and increasing playing time.

Activision Blizzard saw revenue jump 25 per cent in 2020 to $8.086 billion, with an EPS of $2.82 per share compared to $1.95 per share for 2019. (All figures in US dollars.)

“In 2020, we saw the benefits of fundamental changes to our core franchises, including deeper and more consistent engagement with current and new players across multiple platforms. Much of our growth was driven by strong execution in premium content, in-game operations, expanding our presence on mobile, and ramping new engagement models,” said the company in its fourth quarter 2020 press release in February. 

“We are already seeing the impact of our growth initiatives for Call of Duty, World of Warcraft and Candy Crush, which we expect to again drive strong results in 2021. And at the same time, we are making significant progress against our development pipeline for other key intellectual properties, which we expect to fuel further growth in 2022 and beyond,” Activision Blizzard said.

What’s more, the company has continued its hot streak in 2021, boosting revenue in its second quarter to $2.135 billion compared to $1.932 billion a year earlier, with EPS coming in at $0.81 per share compared to $0.75 per share a year earlier. Monthly active users were also on the rise, hitting 408 million compared to 397 million at the end of the Q4 2020. 

On the game development front, ATVI is also in good shape, with new content arriving imminently from Call of Duty along with updates to its WoW and Diablo franchises.

All told, Bolton said Activision Blizzard is in solid shape.

“It has those flagship franchises of Call of Duty and World of Warcraft and Candy Crush and it’s the world’s largest third-party video game publisher,” Bolton said. “It’s got 430 million monthly active users across platforms. So it’s a massive company, and they just need to put some distance behind all of this bad press that has come out.”

“So, yes, I would build a position down here but I’d do it in tranches going down,” he said.

Beyond the sexual harassment and toxic culture claims, the California DFEH suit alleges employment inequalities, saying that women in the company are often paid less than men for similar work and career barriers exist preventing women from attaining higher positions in the company.

“Its top leadership is also exclusively male and white,” the suit states. “Defendants promote women more slowly and terminate them more quickly than their male counterparts.”