After suffering big declines in late 2018, Activision Blizzard (NASDAQ:ATVI) stock has rebounded. Sort of. The shares started 2019 around $45.25 per share. Since then, Activision Blizzard stock,has bounced back 20%, closing at $53.88 yesterday.
But is this a sign that ATVI stock will return to its past highs? Maybe, maybe not. Activision Blizzard faces big competition, especially from companies like Fortnite developer Epic Games. Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO) also add to Activision’s competitive pressures. Activision Blizzard has its work cut for it.
But with franchises such as Call of Duty and World of Warcraft, the company has the potential to turn itself around. So will Activision Blizzard stock price climb in 2020? The jury’s still out, but let’s take a closer look, and see whether the shares are worth buying today.
What Will Move Activision Blizzard Stock in 2020?
Thanks to strong results from Call of Duty and World of Warcraft, ATVI’s third-quarter revenue and earnings beat analysts’ average estimates. But its Q4 revenue and earnings guidance came in below analysts’ average outlook.
So will the company’s sales and earnings rebound in 2020, thanks to its flagship franchises? Or will a tough video-game market get the better of Activision Blizzard stock?
Analysts have mixed views on Activision Blizzard stock. Jefferies’s Alex Giaimo believes the company’s earnings could increase by double-digit-percentage levels in 2020. But Cowen analyst Doug Creutz is concerned over the lack of updates by ATVI on its release of Overwatch 2.
Outside factors may help ATVI in 2020. Next year will bring the launch of new video-game consoles by Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT). As InvestorPlace columnist Ian Cooper wrote in his Nov, 15, article, next-generation PlayStation and Xbox consoles could bolster the company’s sales.
But these new consoles are set to be released just before the 2020 holiday season. So while they will boost demand for video games and provide good catalysts for Activision Blizzard stock, ATVI stock won’t benefit from those catalysts for at least a few quarters.
Meanwhile, as games pivot to mobile devices, Activision Blizzard is making the right moves. Last month, its CEO, Bobby Kotick, sat down with CNBC to discuss the company’s mobile strategy. As Kotick put it, “I see no reason that number (of mobile users) shouldn’t be 1 billion in five years.”
To build such an audience, the company is adapting its franchises to mobile platforms. This year, the company launched a mobile version of Call of Duty. A month after it was released, the game reached 100 million users.
The Positive Trends Are Already Priced Into ATVI Stock
Will ATVI’s initiatives boost Activision Blizzard stock? Does the current share price reflect the company’s potential or have the shares been overlooked by the Street?
ATVI stock is not yet a bargain. The shares’ forward price-to-earnings (forward P/E) ratio is 21.6. Take Two and EA have similar forward P/E ratios.
On an enterprise value/EBITDA basis, Activision Blizzard stock trades at a lower multiple than its peers. ATVI’s EV/EBITDA ratio is 17.1, compared to 20.3 for EA and 38.7 for TTWO. So ATVI may be the cheaper stock.
However, relative to growth, ATVI stock is richly priced. Analysts’ average estimate does call for ATVI’s revenue to climb around 9% between fiscal 2019 and FY20. But does that justify the valuation of Activision Blizzard stock? One could argue that the company’s strong franchises alone justify the current valuation of Activision Blizzard stock.
Call of Duty and World of Warcraft have each been successful for more than 15 years. Other strong ATVI franchises include Overwatch and Candy Crush. But unless Activision Blizzard’s growth starts humming again, I do not expect the stock’s multiple to expand in the near-term.
Don’t Expect Rips (or Dips) from ATVI in 2020
Activision Blizzard stock won’t set the world on fire in 2020. The company’s franchises are solid. But with so-so growth prospects, the current valuation of ATVI stock is somewhat frothy. The company could surprise me in 2020, beating on its conservative guidance and hitting double-digit-percentage growth numbers as some have suggested.
ATVI’s decision to adapt its portfolio to mobile “free-to-play” gaming is a smart move. That is where gamers’ money is moving. But it remains to be seen whether this business model shift will translate into greater profits. Perhaps ATVI’s move from consoles to smartphones is purely defensive.
With Activision at a crossroads, ATVI stock will likely tread water in the coming year. The company could surprise investors this holiday season. But given the stock’s valuation, betting on ATVI to beat its guidance may not be a worthwhile play.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.