After a sharp downside, Activision Blizzard (NASDAQ:ATVI) stock was in an extended period of sideways movement. But almost a year after the steep decline, Activision Blizzard stock has started moving higher. And this upside is not speculative or purely technical; ATVI has positive fundamental developments that back the current momentum.
I am of the opinion that ATVI stock now has strong support (from a technical perspective), in the zone of $45 to $50.
I also believe that the current breakout on the upside is likely to sustain. This coverage will discuss the factors to be bullish on ATVI stock.
Strong Response for Recent Game Releases
ATVI stock has moved higher after consolidation after the company reported better-than-expected second-quarter 2019 results. In addition, the stock’s upside has been triggered by a strong response for recent game releases.
Just as an example, World of Warcraft Classic was launched in August and it generated demand that outpaced server capacity. Similarly, the beta version of Call of Duty: Modern Warfare has become the largest in Call of Duty history.
According to the ATVI: “Call of Duty®: Modern Warfare® Beta has become the largest in Call of Duty history, delivering the most users, the most hours played and highest peak concurrent number of players across PlayStation 4, Xbox One, and PC combined.”
This creates optimism on the global launch of Modern Warfare on Oct. 25 and should ensure that the positive trend for Activision Blizzard stock sustains.
Esports Provides Growth Opportunity
According to Research & Markets, esports is expected to grow at a CAGR of 20% between 2019 and 2025. It is expected that the market size will be $3 billion by 2025.
With ATVI launching the Overwatch League in 2018, the company is already making inroads in the esports market. Further, with the creation of a traditional sports league structure and city-based teams, the company seems to be in the right direction in terms of attracting audience.
According to the CEO, the objective of city-based franchise mode is to “unlock a lot of fans.”
Activision Blizzard is well-positioned to gain from the impending opportunity as esports is still at an early growth stage.
An important point to note is that big brands are already realizing the opportunity in esports. Some of the sponsors for Overwatch League include Intel (NASDAQ:INTC) and Coca-Cola (NYSE:KO).
It is worth mentioning here that ATVI has already utilized machine learning for Statcraft AI.
According to an HBS article: “ATVI could capitalize on their ML technology stack to further develop their E-sports presence, offering a better spectator experience with real-time interactive game data statistics and smart camera action.”
The point I am making is that ATVI has an edge in the esports segment and use of machine learning in the gaming sector will be more prominent in the coming days. This will help in better user engagement and ATVI stock stands to benefit.
Final Words on Activision Blizzard stock
Activision Blizzard stock is trending higher after a relatively prolonged sideways movement and I expect further upside considering the factors discussed.
From a balance sheet perspective, the company is well positioned with $4.68 billion in cash & investments and gross-debt-to-adjusted-EBITDA of 1.1. Further, the company has an annualized free cash flow visibility of $450 to $500 million based on 2Q19 numbers. The financial headroom will allow healthy dividends to sustain.
It is also worth noting that as of 1H19, ATVI generated 32.5% of revenue from mobile devices. In the coming quarters, I expect mobile device generated revenue to trend higher. The adoption of 5G will also be an additional positive for the industry.
In the company’s 2018 annual report, ATVI observed that the industry size is at $140 billion with the company’s market share at mid-single digits. This indicates the level of fragmentation in the industry and the potential opportunity for ATVI. With robust content release, expansion to mobile and re-launch of classic games, the company is positioned to increase market share.
In conclusion, Activision Blizzard stock is still trading at attractive levels after the recent upside. The stock is worth accumulating with an investment horizon of 12-24 months.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
