This should be a fine time to consider Activision Blizzard (NASDAQ:ATVI). It’s October, meaning the holiday shopping season is approaching, which is prime time for video game purchases. There’s another installment of the “Call of Duty” franchise due out and a recent release of a mobile app version of that storied video game series hit 100 million downloads in its first week.
Still, Activision stock and the company itself are in interesting places to put things delicately. The company has found its way into the center of geopolitical controversy involving pro-democracy demonstrators and the regime they oppose in Beijing. There are other examples of U.S. companies finding their ways into this mess, some by no fault of their own, others by less-than-ideal public relations.
For example, Apple (NASDAQ:AAPL) recently removed a map from the iPhone that Hong Kong protesters used to avoid police. That move was widely decried, particularly because Apple’s political leanings are largely liberal in nature. Still, the stock hit an all-time high last Friday.
Nike (NYSE:NKE) was ensnared in the controversy as well, not by any of its own doing, but due to the NBA’s controversial handling of pro-Hong Kong remarks by a Houston Rockets executive. Basically, the long and the short of it is the NBA likes China’s revenue stream and doesn’t want its owners, executives, or players supporting Hong Kong demonstrators. As is the case with Apple, Nike shares haven’t been hurt as a result.
In the case of Activision Blizzard stock, the company’s move was more bold and, arguably, offensive. The company barred elite e-sports player Ng Wai Chung from its competitions for a year due to his support of Hong Kong. Social media backlash across Asia and the U.S. was considerable, but to say the news was damaging to Activision stock is a stretch as the shares lost just 1.12% last week.
Here’s What to Focus on With ATVI
In the current environment where social media is readily accessible for billions of people around the world and news moves quickly, ATVI barring a gamer for his political views, particularly when he stands in solidarity with a pro-democracy movement, amounts to a public relations gaffe.
Folks are right to take the company to task for that gaffe and it is their right to do so. However, it remains to be seen how much of a price Activision stock pays. Are gamers going to pass on the newest “Call of Duty” installment because they don’t like the publisher’s politics? It’s possible, but how probable it is is up for debate.
Buttressing the case for ATVI stock is brand recognition, enviable franchise positioning with including “Call of Duty” and “World of Warcraft,” and the sheer growth of the video game businesses, which is the world’s fastest-growing form of entertainment by revenue.
“In Piper Jaffray’s 38th semiannual survey of teenagers, videogame spending reached its highest share of wallet ever, and console ownership was near peak levels, with 81% of teens saying they intend to buy or already own an Xbox or a PlayStation,” reports Tae Kim for Barron’s.
Proliferation of consoles (hardware) is good news for software publishers such as Activision. After all, no one buys a car just to let it sit in the garage.
Bottom Line: Politics Aside…
Adding to the case for Activision stock is the company’s footprint in the high end of the video game market and its dominance in the e-sports ecosystem via the Overwatch League.
“Activision generally focuses on the higher end of the market, using its capital to fund the higher-budget blockbusters and its marketing advantage to support its titles across multiple advertising platforms,” said Morningstar.
Currently, the company’s bread and butter remains in console games, but it’s shifting to mobile and online gaming, a move that could deliver for investors when the company reports the latter of 2019’s financial results early next year.
Revenue should grow in the mid- to high single-digit area over the next five years, but mobile growth will likely be in the double digits. After this year’s dip, margins should expand over the next four to five years. With that and a free cash flow yield of 4%, ATVI stock is attractive at current levels and could potentially offer upside of 20% from here.
Todd Shriber does not own any of the aforementioned securities.