Can eSports Power Activision Blizzard, Inc. (ATVI) Stock to New Highs?

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The red-hot video gaming sector has cooled off recently after a long-term bullish analyst suddenly turned bearish, saying that Activision Blizzard, Inc. (NASDAQ:ATVI) and Take Two Interactive Software Inc (NASDAQ:TTWO) overshot themselves. For context, ATVI stock is up 70% this year, while TTWO stock has more than doubled.

Can eSports Power ATVI Stock to New Highs?

Cowen, an investment firm which had been an ATVI bull for the past nine years while the stock rose more than 600%, recently downgraded ATVI stock to “Market Perform.” The sudden bearishness from a long-time bull concerned investors, who sold off ATVI stock to the tune of a 3% decline.

Cowen’s downgrade is really just a valuation call. The analysts like the long-term growth story centered around eSports and mobile, but they also think that these growth stories will naturally and inevitably hit road bumps. Trading at 29 times this year’s consensus earnings estimates, ATVI stock is not priced to absorb these road bumps and head higher.

Consequently, Cowen believes ATVI is due for a near-term correction.

Bulls are looking at this selloff as a rare opportunity to buy into a secular growth name which could turn into the next Walt Disney Co (NYSE:DIS) if the company plays its card right in the eSports world. While I certainly understand this vision and believe Activision is powering the 21st-century version of ESPN, I agree with Cowen that there will be road bumps in this process.

Such road bumps are not priced into the stock at the current premium valuation. Thus, buying here ahead of the Overwatch League launch seems unnecessarily risky. The best thing to do might be to wait for ATVI stock to pull back even further.

ATVI Stock and eSports

There is no hiding the fact that eSports are a massive opportunity for Activision.

All signs point to eSports one day rivaling traditional professional sports league in terms of both audience size and revenue. In fact, because most professional sports leagues are regional, eSports could actually be much larger on an annual basis due to its global reach.

Activision is at the forefront of this eSports growth trend. The company is launching the Overwatch League (or OWL) later this year. This will be the first global professional eSports league with city-based teams. So far, those teams are fetching about $20 million a pop, and the buyers are big names, including New England Patriots’ owner Robert Kraft.

Why is everyone so excited about the eSports opportunity? It’s no secret that traditional professional sports leagues are struggling. Just look at ESPN’s viewership numbers. Cord-cutting trends have brought to light the fact that professional sports viewership isn’t as important today as it used to be.

ESports could fill the gap that ESPN is leaving.

Granted, we won’t all stop watching NBA games and turn to watching Call of Duty matches. But, there is a large market of consumers out there who would rather watch a Call of Duty match than an NBA game.

That is why ESPN viewership numbers are declining, while the global eSports audience grew by 37% last year. It’s also why video-game streaming platform Twitch is experiencing massive growth and fetched a near $1-billion takeover price from Amazon.com, Inc. (NASDAQ:AMZN). It’s also why ESPN is dedicating more and more airtime to video game tournaments.

ATVI’s OWL is the first big push to legitimize eSports as something on par with traditional professional sports leagues. If successful, OWL could turn into something quite large.

The NFL rakes in about $13 billion in revenue per year. The MLB earns $9.5 billion, while the NBA takes in $4.5 billion, and the NHL makes about $3.7 billion.

OWL could play in the ballpark of those figures sometime in the near future. ATVI has a market cap of about $46 billion, so a $4-to-$13 billion opportunity isn’t small potatoes. The opportunity is even bigger considering ATVI could launch numerous leagues surrounding each of its different franchises.

Bottom Line on ATVI Stock

Despite all those growth catalysts, Cowen correctly points out that OWL is the first of its kind, and because of that, the risk of things not running smoothly is fairly high. Considering the stock is trading at a significant premium to its historical standards, such road bumps could cause material weakness in shares.

In other words, everyone is buying up ATVI stock ahead of the OWL launch. That puts a lot of strain on OWL to perform exceptionally well, and skews the risk-reward profile of the stock to the downside. Any hiccups early on in OWL will result in ATVI stock falling.

Once the OWL launch is in the rearview mirror and the expectations have moderated, though, the risk-reward profile will skew back to the upside. That would be the time to load up on ATVI stock.

As of this writing, Luke Lango was long AMZN and DIS.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/activision-blizzard-inc-atvi-stock-new-highs/.

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