The long wait is over. The first full-fledged attempt to legitimize the growing eSports industry is finally here. Overwatch League (OWL), the video game world’s version of the NBA or NFL, kicks off this week with numerous preseason games (yes, OWL even has its own preseason). The company behind this revolutionary league is Activision Blizzard, Inc. (NASDAQ:ATVI) and ATVI stock has risen modestly in anticipation of the OWL launch.
This makes sense. OWL is ATVI’s biggest catalyst in recent memory. And with that big catalyst finally here, is it time to buy ATVI stock?
OWL and ESports Will Be Huge for ATVI
There is no denying the fact that OWL and eSports provide a tremendous growth opportunity for ATVI.
There is huge and growing demand for professional video game leagues. ATVI is the first company to step up to the challenge of meeting this growing demand. OWL looks, acts, and sounds a lot like the NBA, NFL or MLB. There are multiple city-based teams, each with their own logos and rosters. The teams are segregated into an Atlantic Division and a Pacific Division. There are season stats, standings, preview shows and official team/league gear. The teams have owners, one of whom is New England Patriots’ owner Robert Kraft.
Just look at the OWL website. It looks like ESPN for the pro video game world.
And that is exactly what ATVI is doing. The company is powering the 21st century version of ESPN.
Now, consider that OWL is only one of a great number of pro video game leagues ATVI could launch. Consider too that these leagues scale much more easily on a global basis, because they are all digitally based (unlike an actual game of basketball, you don’t need to be in the same building to play the same video game).
Put it all together and its easy to see that there are big dollars in ATVI’s future.
ATVI Stock Is Priced for Big Growth
But in the stock market, its all about expectations.
Right now, expectations for ATVI stock are big heading into OWL preseason. ATVI’s valuation is near a 5-year high on a price-to-earnings, enterprise-value-to-EBITDA and price-to-cash-flow basis. Moreover, the current earnings, EBITDA and cash flow multiples appear to be approaching near-term peaks.
ATVI stock is also up 67% in 2017, versus a 17% gain for the S&P 500. But over the past 3 months, ATVI stock is down 7% versus a 7% gain for the S&P 500. The recent under-performance ahead of a big launch implies that investor demand may be topping out in the near-term.
Plus, ATVI stock trades at a 100% premium to its growth prospects (roughly 27 times this year’s earnings for 13.5% projected earnings growth over the next several years). That is the same premium being given to the S&P 500. So, at best, ATVI is trading in line with the broader market.
The problem here is that these big expectations are against a backdrop wherein execution risks are just as big.
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 and is up big year-to-date, such road bumps could cause material weakness in shares.
Bottom Line on ATVI Stock
ATVI stock might benefit from a mini-rally here, as some investors get excited with OWL preseason underway.
But I think that mini-rally will be short-circuited by expectations getting ahead of themselves.
The time to buy ATVI for long-term upside in the eSports world is when the OWL launch is in the rearview mirror. At that point, expecations will have moderated, the valuation will have compressed and the long-term risk-reward profile will skew towards the upside.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.