Alongside the rest of the market, video game publisher Activision Blizzard, Inc. (NASDAQ:ATVI) has rallied big over the past several days. ATVI stock is up 7% in December, while the S&P 500 is up 2%.

Obviously, the recent rally in ATVI stock is partially powered by general excitement regarding potential tax reform. It looks almost like a sure thing that the corporate tax rate will get cut. Although ATVI isn’t a full taxpayer (17% average effective tax rate versus 30% for S&P 500), any reduction in the U.S. federal statutory income tax rate will help out ATVI earnings.

 

But the bigger part of this rally — and what is driving the out-performance in ATVI stock — is excitement regarding a successful launch of Overwatch League.

So is Overwatch League really the future of eSports? Can it become the next NBA or NFL? Most importantly, does all this make ATVI stock a buy?

The answers are kind of a mixed bag. Overwatch League is the future of eSports. It (and other eSports leagues) can grow to become something nearly as popular as the NBA or NFL. But ATVI stock is already fully priced for these things to happen — in the near-term, at least.

Consequently, I think ATVI stock is a wait-now, buy-the-future-dip type of stock at these levels.

OWL Preseason Is Good News for ATVI Stock

For those who are unaware, Activision’s Overwatch League (or OWL) is the first full-fledged attempt to legitimize the growing eSports industry. It is essentially the video game world’s version of the NBA or NFL, with city-based teams, standings, statistics, and salaries. 

OWL just launched with four days of preseason action in Los Angeles.

By most reviews, OWL’s preseason was a huge hit.

Cody Luongo from eSports Betting Report said OWL preseason “silenced naysayers” and seemed “to fulfill, if not surpass, the immense expectations.” Meanwhile, Tyler Erzberger from ESPN Esports said that the OWL preseason event was a “glimpse of the future” for eSports. Search interest related to OWL exploded during preseason. So did search interest related to “MLG” or “Major League Gaming,” the site where fans could live-stream the games.

Amid all the positive reviews of OWL preseason, ATVI stock is up big in December.

ATVI Stock Will Head Higher in Long-Term

But I think investors should temper their expectations.

Not for the long-term. ATVI stock will head materially higher in the long-term as eSports goes more mainstream and leagues like OWL become the little brother of the NBA, NFL, and MLB.

There is a clear pathway for this to happen. ESPN viewership numbers are declining, while the global eSports audience grew by 37% last year. There is clearly a shift in viewership from traditional sports to eSports. With OWL’s recent launch, all sings point to this shift continuing in the foreseeable future.

And the opportunity is quite large for two reasons. One, professional sports leagues make a ton of money: The NFL rakes in about $13 billion in revenue per year. Two, OWL is just one of what could be a great many professional eSports leagues.

All in all, the long-term growth opportunity in eSports for ATVI is quite large. That means ATVI stock will head higher in a multi-year window.

ATVI Stock Looks Fully Valued in Near-Term

But expectations need to be tempered in the near-term.

ATVI stock looks more than fully priced in the near-term, especially considering execution risks remain. As I’ve pointed out before, OWL is the first of its kind, meaning things won’t always run as smoothly as planned. We already got a glimpse of this at OWL preseason. One of the 12 OWL teams dropped out of preseason action at the last minute due to “player logistics issues.”

Such bumps in the road will continue to happen. But ATVI stock isn’t priced for any bumps in the road.

ATVI stock is trading at 29.5x this year’s earnings estimate for multi-growth earnings potential of 13.5% per year. That means ATVI stock is trading at a 120% premium to its growth potential.

But the S&P 500 is trading at a much lower multiple (20.5x) for growth that isn’t that much slower (10.5%). The S&P 500 is trading at just a 95% premium to its growth potential.

Clearly, expectations on ATVI stock are too big in the near-term.

Bottom Line on ATVI Stock

I think this stock is due for a sizable pullback in January when OWL regular season action gets underway.

But I also think that such a dip will be a tremendous buying opportunity for long-term oriented investors. ATVI is gearing up to change the eSports world, and that means huge long-running benefits for ATVI shareholders.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.