Shares of Activision (NASDAQ:ATVI) have been hammered over the past several months amid concerns that a prolonged golden era of growth is coming to a close for the video game publisher. Namely, the company’s massive micro-transaction tailwind is slowing, as free-to-play games like Fortnite have risen in popularity. Also, the company’s headline holiday release, Call of Duty: Black Ops 4, didn’t perform up to expectations, leaving investors to wonder if competition is finally catching up to Activision.
Overall, Activision stock has dropped more than 40% off its early October 2018 highs.
But, this selloff is overdone. As I’ve said multiple times before, the long-term growth fundamentals here remain favorable. The company has an exceptionally attractive portfolio of video game titles that have secular appeal. Digital and mobile consumption are only going up globally, and that bodes well for video game engagement growth. Plus, esports is really starting to come into its own, and will one day be a huge revenue source for Activision. Even further, new video game console innovation in AR/VR and cloud gaming will reinvigorate industry-wide growth soon.
In other words, the fundamentals underlying Activision stock remain favorable, meaning the recent selloff is an opportunity. But, as with any depressed stock, ATVI stock has been waiting for that big catalyst to spark the reversal.
That big catalyst may have finally arrived. At a keynote event in mid-March, Activision unveiled that Call of Duty: Mobile is going global. That’s big news. Big enough news to be the big catalyst that could spark a long overdue rebound in Activision stock.
As such, I think Activision stock is finally ready to break out of its slump, and rally to more fundamentally sensible levels.
‘Call of Duty: Mobile’ Is A Big Deal
Call of Duty: Mobile has been in the works for some time. Originally, though, it was only supposed to launch in China. Now, Activision is saying that the new game will launch essentially everywhere, including North America, South America and Europe.
This is a big deal. Call of Duty: Mobile checks off all the boxes for a successful video game in 2019. First, and foremost, it is part of the beloved and timeless Call of Duty series. Second, it’s mobile, where Call of Duty has a limited presence and where consumer engagement is rising fastest. Third, it’s free-to-play, following in the footsteps of blockbuster free-to-play success stories before it like Fortnite and Player Unknown: Battlegrounds. Fourth, it’s a first-person shooter, and that’s where all the growth is these days in action games.
In other words, Call of Duty: Mobile has all the right features to turn into a big hit. If it does, this could be the big catalyst that ATVI bulls have been waiting for since late 2018.
Let’s suppose Call of Duty: Mobile does execute on its potential and turns into a big hit. If so, that will completely change the narrative surrounding Activision stock. This will no longer be a company losing share to free-to-play titles, with a slowing micro-transaction headwind. Instead, it will be a company that has successfully joined the free-to-play category, and in so doing, turned a slowing micro-transaction headwind into a tailwind. Investors will rally around this turnaround, and buy into the stock, in anticipation of renewed growth in 2019/20, and thereafter.
Overall, Call of Duty: Mobile is a big deal for Activision stock. If successful (and it should be), this game could be the catalyst that causes Activision stock to break out of its current slump.
The Stock Has Tons Of Upside Potential
The coming-soon turnaround rally in ATVI stock has a ton of upside potential, mostly because this stock was overly beaten up in late 2018 and early 2019. Here are the numbers:
- Activision stock hasn’t recovered from its late 2018 selloff, and is still more than 40% off 2018 highs, while the broader indices are now less than 5 points off all-time highs.
- The stock trades at 21-times forward earnings. Through all of 2018, ATVI stock never traded below 24-times forward earnings.
- The stock also trades just 4.8-times trailing sales. That matches the lowest this multiple has been in the past three years (January 2017).
- The dividend yield is up at 0.7%, the highest it has been in three years.
- Earnings estimates for this year have dropped by more than 20% over the past 90 days, implying that there’s room for significant upward revision if things start going right in 2019.
Overall, the numbers all say one thing: Activision stock has a lot of upside firepower if the fundamentals and narrative turn around in 2019. Call of Duty: Mobile is a hint that such a turnaround is likely to happen. As such, Activision stock could break out from here into the end of the year.
Bottom Line on ATVI Stock
Activision stock is significantly undervalued at prices below $50. But, the stock needs a big catalyst to wake up the bulls. Call of Duty: Mobile has the potential to be that big catalyst. As such, this could be the early stages of a multi-month breakout in ATVI stock.
As of this writing, Luke Lango was long ATVI.
