ATVI Stock Forecast: Activision Blizzard Is Still A Dependable Bet On Video Games

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

  • Activision Blizzard’s 1-year price return is –41.78%. This is an opportunity to own the stock at a notably lower price.
  • Going forward, the growing $150 billion/year video games industry will ultimately help ATVI recover.
  • Management ignored my previous recommendation that it should create a heroes-based Battle Royale game based on Overwatch.
  • The only thing that’s keeping me long on ATVI is its King Digital subsidiary. King’s Candy Crush is still among the world’s top-grossing video games.

The management deserves all the blame for the massive decline in Activision Blizzard’s (ATVI) stock price. ATVI’s one year price return performance is -41.78%.  Many shareholders (including us) are now underwater because management was a laggard in addressing the threat of Fortnite and PUBG. Activision did not heed my suggestion that a heroes-based Battle Royale game (based on its PC First Person Shooter multiplayer game, Overwatch) could have minimized the impact of Fortnite and PUBG last year.

(Source: Seeking Alpha)

Electronic Arts (EA) likely got inspired by my idea and made the Heroes-based Battle Royale game Apex Legends. The free-to-play Apex Legends is now breaking Fortnite’s records in online viewership and number of downloads. EA was smart enough to make Apex Legends a team-based Battle Royale game that took the best ideas of League of Legends, Overwatch, and Fortnite.

Apex Legends is so popular right now that Tencent (TCEHY) reportedly wants to license it for the China market. The point is Activision got too reliant on its e-sports Overwatch title that it allowed a much smaller studio like Respawn Entertainment to develop Apex Legends which clearly took inspiration from Overwatch and Hi-Rez Studios’ Paladins Battlegrounds.

Expensive Mistake Of Ignoring The Ascent Of Battle Royale Games

Activision was hinting last March that it will release its own Battle Royale game but it never did. This tardiness is why most of its PC and console games never got monetized as much as investors wanted them to be. SuperData’s charts below easily explains why investors dump ATVI in drove. The buy-to-play games of Activision Blizzard last year were grossly outgrossed by Fortnite and PUBG.

(Source: SuperData Research)

It is worth noting that Overwatch only grossed $429 million last year. This is far below the $1.1 billion that Candy Crush Saga made. It’s good that Activision owns King Digital (who develops and publishes Candy Crush Saga). It is embarrassing that a 7 year old casual mobile game like Candy Crush Saga made more money than any Activision Blizzard PC/console games released last year.

Investors abandoned ATVI because Activision’s management clearly showed indecisiveness. Activision still has no clear plan to release new games this year. As per its latest earnings report, management said the company will increase investment in its biggest franchises. It was clear that Activision has ran out of new ideas and will just rely on its Call of Duty, Overwatch, and Diablo franchises.

This is very disappointing to investors and easily explains why ATVI is now trading -50.31% down from its 52-week high price of $84.68.

Mobile Games Is Activision’s Saving Grace

I am still endorsing ATVI as a buy because I appreciate the long-term gold mine in King Digital’s Candy Crush Saga franchise. ATVI is now more affordable and this company still has a bright future in the growing mobile games industry. King Digital is a solid leader in the $57.1 billion/year mobile games industry.

The chart above illustrates that China’s suspension of new games approval will slow down Asia. However, mobile games revenue will still continue to grow in North America and Europe.

Why Candy Crush Saga Is An Infinite Gold Mine

King Digital’s managers are clearly smarter than Activision Blizzard’s. King Digital’s quarterly revenue contribution of $543 million (+5% Y/Y) is helping offset the lethargy of Activision’s PC and video games business. King’s Q4 operating income was +28% Y/Y, $207 million. Majority of this strong sales is from Candy Crush Saga games.

It is very old but the original Candy Crush Saga is still the top-grossing iPhone game in the United States. Based on Thinkgaming’s estimates, Candy Crush Saga’s average daily sales from U.S. iPhone players is $1.5 million. This is higher than Fortnite’s average daily sales of $1.15 billion.

(Source: Thinkgaming)

ATVI is a buy because it owns the top-grossing iPhone game in America. Americans are among the top spenders on mobile apps. It is therefore an important industry gauge if a mobile game becomes top-grossing among American. American iPhone gamers spent an average of $42, +22% Y/Y.

Conclusion

Candy Crush Saga’s $1.1 billion earnings last year assured me that King Digital is now Activision Blizzard’s most important growth driver. Investors should accept that Activision has a long-term tailwind from King Digital. ATVI deserves higher valuation ratios.

(Source: Seeking Alpha)

My fearless forecast is that ATVI can hit $60 by end of 2019 or early next year. My price target is higher than the average 12-month PT of $55 made by Wall Street Analysts.

You can trust me more because I, Motek Moyen, is ranked no.56 among 11,918 professional analysts/Wall Street analysts/financial bloggers. I am outperforming thousands of Wall Street analysts.

(Source: TipRanks)

Compared to other video games companies, ATVI is notably undervalued. As per the chart above, ATVI has much lower P/E, Price/Book, and EV/EBITDA ratios than its peers. Investors will eventually realize that ATVI deserves better valuation than Zynga (ZNGA). Activision has a much better balance sheet and profitability record than Zynga.

I Know First’s stock picking algorithm has a bullish one-year market trend forecast for ATVI. It apparently shares my view that ATVI was oversold and is now unfairly undervalued.

How to interpret this diagram.

Past I Know First Success with ATVI

I Know First has been bullish on ATVI’s shares in past forecasts. On October 18th, 2017, the I Know First algorithm issued a bullish 1 year forecast for ATVI with a signal of 12.1 and a predictability of 0.19, the algorithm successfully forecasted the movement of the ATVI share.  After a year, ATVI’s shares rose by 16.46% in line with the I Know First algorithm’s forecast. See chart below.

This bullish forecast for ATVI was sent to the current I Know First subscribers on October 18th, 2017.

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Please note-for trading decisions use the most recent forecast.