Activision Blizzard (NASDAQ: ATVI) is one of the best performing stocks over the past two decades. The videogame conglomerate has crushed the S&P 500 by more than 7000% since 2000, yielding about 169% in the same period. With its Triple-A console and PC titles, it has been able to consistently increase profits due to the endurance of franchises such as Call of Duty and World of Warcraft. But with new gaming paradigms on the horizon such as Virtual Reality (VR), eSports and the constant rise of mobile gaming, Activision will have to evolve to keep up with the times.
Here’s what the business can look like in five years.
Image Source: Getty Images.
What will be different
Over the past two years, the two major shifts in the game have seen the growth in mobile (mainly smartphone games) and the free play concept royal concepts such as Fortnite. The growth in these categories must continue, and Activision is preparing to adjust its business accordingly. In the past, the only way a gamer could access Call of Duty would buy a $ 60 game for their console or computer. Well, with Call of Duty Mobile and War zone (the Fortnite– such as Battle Royale game) available as free options, the company has created a three-pillar strategy that allows players to choose how they want to communicate with the franchise. So far, both titles have been roaring successes. Mobile downloaded 100 million downloads within 20 days of launch, and War zone had an estimated 75 million players this summer.
Management calls it its ‘franchise-based strategy’ and hopes to apply it to all its games, not just Call of Duty. If they perform five years from now, titles like Herdsteen, Diablo, en Ear Watch can have much larger user numbers than today.
On the eSports front, Activision Blizzard is working to expand professional leagues for each of its franchises as another pillar to increase engagement with its users. It’s very similar to professional sports leagues, with teams and owners and players, but instead of playing a sport, teams compete by playing each other in video games. For example, the Call of Duty league has 12 teams competing for $ 6 million in prize money each year. The company earns money through sponsorships, ticket sales and broadcasting rights. It is currently a small part of the business, but by 2025 eSports is expected to run a $ 2.7 billion business. Activision is likely to capture a large chunk of this pie.
Finally, with VR, investors may worry about a platform shift from consoles to penetrating glasses like the Oculus, which is owned by Facebook (NASDAQ: FB), and how it may affect Activision’s user base. As long as Activision can switch its games to work seamlessly on VR glasses, these new interfaces should actually be appealing to the company’s overall business.
What will remain the same
In five years, you can be confident that players still want to communicate with all of Activision Blizzard’s top franchises. They have remained at the top of the charts throughout the last two decades, so you have to ask yourself why the next five would be different. Players still want to play first person shooter titles like Call of Duty and immerse themselves in role-playing games such as World of Warcraft.
You can also be confident that Activision Blizzard will continue to pay a dividend in 2026 and probably at a higher rate. Its current dividend yield is only 0.51%, but the payout per share has increased every year since 2010.
But is the stock a buy?
During the twelve months ended September 2020, Activision generated approximately $ 2 billion in cash flow, a number that has not changed much over the past few years. With a market capitalization of $ 73 billion, the stock is now trading at approximately 36.5 times its cash flow below, an expensive multiple for a fairly mature company. However, if management is able to implement mobile, free-to-play and eSports initiatives, there are many monetary levers that the company could pull over the next five years. Activision Blizzard does not look like a screaming buy, but there is no reason to worry about owning shares, not even at a premium valuation.