Activision Blizzard: Beats Earnings and Raises Guidance, Is The Stock A Buy?
The video game industry has been one of, if not the most exciting part of the media/entertainment market for a while now. This genre produces consumers an unparalleled immersive storytelling experience. And the continued rise of technology in this space has enabled games to connect players around the world, creating scale, networking effects, and satisfying experiences that other areas of the entertainment industry cannot match. And, as augmented and virtual reality capabilities increase, the growth of this industry should only continue to accelerate.
Regarding this macro trend, John Ballard, a Nobias 5-star analyst who writes for The Motley Fool recently said, “Top video game stocks have outperformed the broader market for decades, and the ongoing advancements in gaming technology will only continue to push the industry forward. It's estimated that as many as 3 billion people worldwide will be playing games in some form by 2023, keeping the video game industry on pace to grow around 10% per year.”
What’s more, Various growth and adoption trends across the gaming space were accelerated during the pandemic due to the stay-at-home policies put in place regarding social distancing. And now, coming off of such a strong year, we’re seeing the gaming companies begin to post earnings which include forward guidance looking past the pandemic period. These stocks were obvious winners during the trailing twelve months, but what does the near-term future hold? Let’s take a look at what analysts have to say about one of the leaders in the market, Activision Blizzard (ATVI), which just posted its first quarter earnings report.
When thinking about Activision’s near-term success, the question that Demitri Kalogeropoulos, a Nobias 5-star analyst who writes for The Motley Fool, asked himself was whether or not the company can continue to performing in a changing macro environment. In a recent article, he said, “A lot has changed since Activision issued its first 2021 outlook in early February. COVID-19 vaccines are increasingly available and many economies are reopening around the world, potentially pressuring demand for at-home entertainment. Netflix (NFLX) described that exact phenomenon when it recently reported surprisingly weak subscriber growth in its latest quarter and forecast weak subscriber growth for next quarter as well.”
In his pre-earnings ATVI breakdown, Kalogeropoulos highlighted a variety of potential headwinds that the company faces, including declining user engagement as the world re-opens and consumers are allowed out of their homes more freely. However, all potential near-term risks in mind, he concluded, “But Activision is entering this period with some serious competitive advantages, including its biggest engaged gamer audience ever. That's why it would be a mistake to bet against the leading video game developer in 2021.”
And, it appears that he was correct.
On the heels of Activision’s recent earnings report, Joe Tenebruso, a Nobias 5-star analyst, published an article on The Motley Fool, titled, “Why Activision Stock Popped Today”. He noted that shares of ATVI rallied nearly 7% after their Q1 report, which included a revenue figure that “surged 27% year over year to $2.28 billion.” Tenebruso highlighted Activision’s CEO, Bobby Kotick’s remarks following the quarter, in which he said, "Demand for our content has never been stronger.”
But, this wasn’t just a revenue growth story. Tenebruso continued, saying, “Better still, Activision Blizzard's profitability and cash generation both improved significantly. Its adjusted earnings per share (EPS) jumped 29% to $0.98, while its operating cash flow leapt 470% to $844 million.”
During the quarter, ATVI’s business appeared to be firing on all cylinders. Booking rose 36% to $2.07 billion. The company’s in-game net bookings jumped 39.6%, from $0.96 billion a year ago to $1.34 billion during Q1. Activision segment revenue increased by 72%, driven by the success of Call of Duty: Black Ops Cold War and the ongoing success of in-game purchases related to the company’s Warzone game. The Blizzard segment saw 7% growth as World of Warcraft continues to do well. And potentially most importantly to investors, the company’s King franchise, which is Activision’s primary mobile gaming brand, rose 22%, setting an all-time record. King boasted 258 million average daily users during the quarter, showing the global strength of mobile gaming.
The strong Q1 results that ATVI posted allowed its management team to confidently raise its full-year 2021 guidance. The company now says that it expects to produce earnings-per-share of $3.42/share, up from its previous guidance of $3.34. ATVI also raised top-line guidance, now calling for full-year revenues of $8.37 billion, up from its previous guidance of $8.23 billion.
In short, this was a classic beat and raise quarter, which is exactly what investors want to see.
Oliver Smith, a Nobias 5-star analyst who writes for Fintech Zoom, recently published an article highlighting his bullish outlook on the largest gaming pure-play stocks. In his piece, he said, “All three companies [referring to Activision-Blizzard, Electronic Arts (EA), and Take-Two Interactive (TTWO)] are profitable, positive in cash flow, have a strong balance sheet, and operate in a growing market of mobile gaming and in-game transactions.”
Regarding ATVI specifically, Smith said, “Activision has been very aggressive at expanding its mobile gaming exposure. As of April 1, it had numerous games on the top charts.”
ATVI shares currently trade in the $93 range. Over the last week, we’ve seen ATVI shares rise roughly 1%; however, they’re still down from their 52-week highs of $104.03 made back in mid-February before the bottom fell out of the tech-sector trade. So, while the company’s results during Q1 were largely bullish and management remains confident that its growth trajectory remains in place, pointing towards high quality marks for the company, the next question that investors must ask themselves is whether or not shares are fairly valued in the present.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Simply Wall Street, a Nobias 5-star analyst recently published an article on Nasdaq.com discussing the stock’s valuation, titled, “Is Activision Blizzard, Inc Worth $97.30 Based On Its Intrinsic Value?” In this article, the author said, “Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value.” While noting that the DFC valuation method is not without flaws (because there is no sure-fire way to evaluate a company in the market due to the copious amount of variables at play), Simply Wall Street says, “We generally believe that a company's value is the present value of all of the cash it will generate in the future.” Using a 10-year free cash flow forecast, Simply Wall Street arrived at a “present value of 10-year cash flow” otherwise referred to as PVCF, of $24 billion. Then, the author calculated the stock’s terminal value using the Gordon Growth Formula, arriving at a $75 billion figure. Next, Simply Wall Street calculated the present value of the stock’s terminal value, arriving at $37 billion. And finally, using these figures, the author formulated ATVI’s total equity value at $61 billion. After dividing the total equity value by the number of outstanding shares, Simply Wall Street’s formula concluded that ATVI’s fair value is $79.06, which is roughly 15% below today’s share price.
The debate between growth and value has been raging in the markets for as long as stocks have been traded and this likely isn’t going to stop anytime soon. However, in his recent bullish article, John Ballard concluded that even though ATVI is “not cheap” on a price-to-free cash flow basis, “I would still favor Activision because it operates some of the most popular gaming franchises in the market and has a massive player network of 397 million monthly active users. The company has a multi-year record of delivering outstanding operating results and paying annual dividends. For these reasons, I believe Activision Blizzard is the better investment if you're looking for a relatively safe video game stock.”
Disclosure: Nicholas Ward has no positions in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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