When it comes to Activision (NASDAQ:ATVI), my investment strategy has been pretty straight-forward: wait and see. For the past several months, bulls have been pounding on the table about Activision stock.
Specifically, they’ve been pounding on the table about the entire video game industry’s huge growth prospects through eSports, cloud gaming, micro-transactions, and next-gen gaming innovation. But, despite those persistent bullish calls, Activision has traded sideways for the past six months.
At the beginning of March, this was a $72 stock. Now, at beginning of September, Activision trades at $72. That is the textbook definition of sideways trading.
And so, we go back to my investment strategy: wait and see. When it comes to Activision stock, this company is coming off of some huge growth drivers (micro-transactions and next-gen gaming innovation) and has potentially even big growth drivers that will gradually materialize over the next several years (eSports, cloud gaming, and more next-gen gaming innovation).
But, at the current moment, Activision is stuck between growth drivers. The micro-transactions tailwind is slowing, and the eSports and cloud gaming tailwinds haven’t really emerged to the forefront yet. Meanwhile, ATVI trades at a pretty big valuation.
Being stuck between growth drivers and trading at a big valuation isn’t a recipe for success. As such, Activision has traded sideways for several months now. This sideways trading should persist. But, the longer it persists, the better the buy thesis looks because, long-term, this company does have some huge drivers.
Activision Is Stuck Between Drivers
The biggest problem with Activision right now is that the company is stuck between growth drivers.
Yes, there are mini-headwinds and mini-tailwinds everywhere right now. For example, Fornite is really ramping in popularity and provides a serious competition headwind heading into the holiday season. But, Fornite isn’t here to stay for good. Any competition risks therein should last a few quarters, and that’s it.
Meanwhile, the most recent World of Warcraft expansion was the franchise’s fastest selling expansion pack ever. That is a tailwind heading into the holiday season. But, it is just one expansion pack, and doesn’t really say much about demand next year.
In the big picture, Fornite competition and World of Warcraft expansion pack success aren’t all that meaningful. The big drivers here are micro-transactions, next-gen gaming innovation, eSports, and cloud gaming.
In terms of those big drivers, Activision is caught in transition between micro-transactions / next-gen gaming innovation, and eSports / cloud gaming.
Micro-transactions were the video game industry’s biggest growth driver over the past several quarters. But, due to some negative press regarding overcharging and these games become saturated with in-game purchases, the micro-transactions tailwind has slowed meaningfully over the past several months.
Meanwhile, the whole gaming industry also got a big boost last year from the Switch, a next-gen console which integrated on-the-go and at-home playing. But, the Switch was last year’s hype, and there hasn’t really been a new console this year to pick up the slack.
On the other side of things, eSports is booming, but companies like Activision are still just figuring out how to best monetize eSports. Consequently, monetization rates aren’t that big. And, while cloud gaming promises to change this whole industry for the better, that technology is still a few quarters away from becoming a reality.
In totality, Activision is stuck between growth drivers. That isn’t a good place to be if you are looking for stock price appreciation.
eSports and Cloud Gaming Will Power Activision Stock
In the long run, Activision stock will head way higher because of two things: eSports and cloud gaming.
Before too long, eSports will be huge. The writing is already on the wall for certain eSports leagues to reach NBA, NFL, and MLB levels of popularity and revenue. Traditional sports viewership is down. eSports viewership is up.
Plus, these games are way more globally connected (someone in China can play with someone in California instantaneously, because you don’t have to physically be with someone to play video games together). Over the next several years, eSports will emerge as a mega-trend, and companies like Activision will make a bunch of money as a result.
Cloud gaming will be just as big. Netflix (NASDAQ:NFLX) pioneered the method of streaming videos and TV shows through an over-the-top service, thus making DVD players obsolete and turning the movie watching industry into a high-margin subscription business.
Activision is trying to do the same in the video game world. The implications of this over-the-top shift are huge, and present a $75 billion-plus opportunity for Activision.
Thus, in the long run, the stock should head higher, powered by the eSports and cloud gaming mega-trends.
But, the long-term rally in Activision stock won’t start now. Instead, this stock looks fully valued today, and without any big growth drivers boosting financials, it is tough to see Activision breaking out.
Alas, we come back to the investment strategy: wait and see. Wait for the big drivers to arrive. See how the stock reacts. Then, if the opportunity presents itself, buy the dip.
Bottom Line on Activision Stock
There’s no need to rush into Activision stock now, with the valuation maxed out and without big growth drivers. Longer-term, this stock will head higher. But, it needs to consolidate before it goes on the cloud gaming and eSports rally.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
