Activision Blizzard (NASDAQ:ATVI) will report its quarterly earnings on Nov. 7. Lately, the company has regained investors’ confidence, with ATVI stock rebounding about 20% in the last three months. But now Activision Blizzard stock is trading at an unfavorably high trailing price-earnings ratio of 25,
Weak Video Game Sales
Research firm NPD reported that industry video game sales declined 8% year-over-year in September to $1.278 billion. The full results are shown in the chart below:
|September 2019 Dollar Sales||Sep’18||Sep’19||Change|
|Total Video Game Sales||$1.396b||$1.278b||-8%|
|Video Games Hardware||$307m||$240m||-22%|
|PC & Video Games Software (PC, Console, and Portable; Physical and Full Game Digital Formats from the STEAM, PlayStation, and Xbox platforms)||$761m||$732m||-4%|
|Video Games Accessories & Game Cards||$328m||$308m||-7%|
None of Activision’s games was among the top-selling three titles last month. The three best-selling games were NBA 2K20, Borderlands 3, and FIFA 20. The first two titles were made by Take-Two Interactive (NASDAQ:TTWO). Electronic Arts (NASDAQ:EA) is the publisher of NBA 2K20. As a result, the high P/E valuations of Take-Two are justified, whereas those of ATVI stock aren’t. For the multiples of Activision Blizzard stock to expand, Activision needs more than just more hit game titles.
Growth From Call of Duty: Mobile
The value of Activision Blizzard stock has jumped from $10 billion in 2012 to around $43 billion today, partly due to the advent of the company’s games-as-a-service model. But to boost ATVI stock to higher valuations, the company’s mobile division needs to be more successful. To extend the success of the Call of Duty franchise to mobile, Activision earlier this month launched the game as a mobile app. Revenue from the game, through in-app sales, will be modest in the first year but could grow exponentially in the second year and beyond.
Downloads of CoD: Mobile topped 35 million in the three days following its launch on Oct. 1. That statistic, plus the game’s #1 ranking on iOS in over 100 countries, suggests that ATVI will soon be able to meaningfully monetize the app.
On the cost side, Activision’s partnership with Tencent (OTC:TCEHY) for the development of the CoD mobile game has lowered ATVI’s expenses and risks. Additionally, Activision has benefited from the knowledge that Tencent has gained from successfully developing mobile games. Activision Blizzard stock has rallied since June because investors have become more upbeat about the revenue potential of mobile games.
A Possible Turning Point for Activision Blizzard Stock
The success of the mobile version of CoD is a potential turning point for Activision. If the game continues to be successful, ATVI will be more confident about launching a mobile version of Diablo. And if the Call of Duty mobile game is more successful than expected, Activision may even decide to unveil a mobile version of World of Warcraft, too,
Activision Blizzard Stock Is Facing Headwinds
Members of Congress of both parties are calling on ATVI to reconsider its decision to punish a Hong Kong player for his political statements during a live stream. If gamers see Activision as a company that suppressed free speech and will bow down to China, they may boycott the brand and all of its games.
Although Activision reversed the ban, the company will still get scrutinized by the U.S. government for some time.
The Bottom Line on Activision Blizzard Stock
ATVI stock is worth close to $60 if its revenue grows meaningfully in fiscal 2020 and beyond.
|Revenue and EBITDA Forecast|
|(USD in millions)||Input Projections|
|Fiscal Years Ending||Dec-18||Dec-19||Dec-20||Dec-21||Dec-22||Dec-23|
|% of Revenue||33.4%||34.8%||37.6%||38.3%||36.4%||36.8%|
Chances are high that the mobile version of CoD will significantly improve ATVI’s financial results. The mobile version might also increase the overall “buzz” about the series, leading to increased sales of the PC and console versions of the franchise as well.
.As of this writing, the author did not hold a position in any of the aforementioned securities.