Activision Blizzard (NASDAQ:ATVI) stock seems to have finally ended its slump. The release of the company’s latest World of Warcraft game breathed new life into Activision Blizzard stock. The equity faced a difficult 12 months after it lost half its value, then spent months in a narrow trading range.
Competitive threats and declines in the company’s monthly active users (MAUs) caused Activision Blizzard stock to lose half of its value between October and February. Although new versions of its most popular games have helped to revive Activision Blizzard stock, the equity may struggle to return to its recent highs amid formidable competition.
The Rally of ATVI Stock Appears Set to Continue
Back in May, I predicted Activision Blizzard stock would remain range-bound because it lacked a catalyst. In August, ATVI stock jumped after the company released World of Warcraft Classic on Aug. 27. That helped to spark a surge by Activision Blizzard stock to its current price of about $54.
Some may wonder if they should buy ATVI stock now. The shares remain well below their 52-week high of $84.68. But analysts, on average, still expect the company’s earnings to fall by 15.8% this year, although the average estimate calls for an estimated 15.5% rebound in 2020.
Activision Blizzard stock trades at a forward price-earnings (P/E) ratio of 21.3. That is well below its average P/E ratio, over the last five years, of just over 51.
There are reasons to believe that Activision Blizzard stock can reach that valuation again. The latest World of Warcraft release has certainly helped Activision Blizzard stock. Also, Call of Duty: Modern Warfare Beta has attracted the most interest of any beta game in Call of Duty history.I think the new game’s release on Oct. 25 will boost ATVI stock again.
But the Rebound of Activision Blizzard Stock May Be Weak
InvestorPlace contributor and ATVI bull Luke Lango believes ATVI stock can reach $60 in the next 12 months. But that represents less than a 10% increase from the shares’ current levels.
Also, much like Take-Two Interactive (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA), ATVI relies heavily on console and PC games. That makes sense, since its most successful games have been based on those platforms. Moreover, ATVI created the Overwatch League and acquired King Digital, so one cannot accuse the company of resting on its laurels.
King Digital brought ATVI into the smartphone and tablet gaming market.King also had great success with Candy Crush before it was acquired by Activision. However, King’s MAUs tumbled from 463 million when Activision first took over in 2016 to 258 million today.
In fairness, King’s MAU decrease was the smallest of any division of ATVI in the second quarter of 2019. Still, the performance of the company’s smartphone and tablet segments has been weak over the longer term. That makes one wonder how Activision Blizzard stock will compete with the likes of Glu Mobile (NASDAQ:GLUU) and Zynga (NASDAQ:ZNGA).
The Bottom Line on Activision Blizzard Stock
Investors should temper their expectations of Activision Blizzard stock. The slump of ATVI stock finally turned around after the release of World of Warcraft Classic. Given that rebound, it’s safe to assume that the full release of Call of Duty: Modern Warfare will further boost Activision Blizzard stock. ATVI may even reach Lango’s $60 price target.
But then what?
The company continues to face declining MAUs. I think that the MAUs of the Activision and Blizzard divisions will climb after their new games are released.
But what about King Digital? Smartphone and tablet-based games continue to draw increasing attention. But given the continual decline of King Digital’s MAUs, one has to wonder how the company will fare over the longer term.
The release of the latest Call of Duty game should continue to take Activision Blizzard stock higher in the short-term. But in light of its declining MAUs in general and the struggles of King Digital in particular, ATVI may be more of a trade than a long-term investment.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
