After an ugly 2018 wherein shares lost nearly half of their value to end the year, Activision Blizzard (NASDAQ:ATVI) stock has bounced back in a big way in 2019. Year to date, Activision Blizzard stock is up an impressive 27%, mostly thanks to the fact that the company’s core Call of Duty series is firing on all cylinders, its big mobile push has gone very well and the company has expanded its reach in the still quickly growing esports world.
The good news is that all of these tailwinds will continue in 2020. The better news is that more tailwinds will appear on the scene, too. And, the best news is that the combination of these old and new tailwinds will propel Activision Blizzard stock towards $70 next year.
That’s why I like ATVI stock going into 2020. Next year is shaping up to be a really good year for the video game market, and an especially good one for Activision Blizzard. Shares, while up nearly 30% year to date, remain well off their 2018 highs, and are still discounted relative to the company’s profit growth prospects over the next few years.
Strong growth catalysts plus a discounted valuation? That usually equals big share price gains, and that’s exactly what you’ll get with ATVI stock in 2020.
Activision Blizzard Will Have a Great 2020
While calendar 2019 has been a strong year for Activision Blizzard, calendar 2020 is shaping up to be an even better one.
In 2019, three things worked for Activision Blizzard. First, the Call of Duty series regained momentum, with the latest installment, Modern Warfare, becoming the most played Call of Duty game, ever. Second, the company’s big mobile push went really well, as Call of Duty: Mobile turned into the biggest mobile game of 2019. Third, Activision Blizzard continued to foster robust growth in its core Overwatch esports League.
All of this will continue in 2020. Activision won’t announce holiday quarter numbers until early 2020. Those numbers will be great thanks to the huge success of Modern Warfare. At the same time, Call of Duty: Mobile will continue to gain traction in 2020, while Overwatch League will come back with even more teams and bigger sponsors in mid-2020.
In addition to these tailwinds persisting, new tailwinds will emerge in 2020. On the macro side, the video game industry will get a big boost thanks to the first new Xbox and PlayStation console launches since 2013. The introduction of cloud gaming in these platforms could make the launches even bigger. Meanwhile, on the micro side, Activision Blizzard is debuting the Call of Duty League in January 2020, and will launch Diablo Immortal (a mobile version of Diablo) and a World of Warcraft expansion in early 2020. Overwatch 2 and Diablo 4 have also been announced, and will likely launch in 2020 or 2021. There’s also the potential for Overwatch to go mobile.
Zooming out, there are a ton of macro and micro catalysts on the horizon for Activision Blizzard in 2020. All those catalysts could turn 2020 into a blockbuster year for the video game publisher.
Activision Blizzard Stock Remains Discounted
Given the company’s huge upside catalysts on the horizon in 2020 and 2021, Activision Blizzard stock remains discounted, despite its near 30% year-to-date rally.
Global video game spend climbed about 9% higher in 2019, according to Newzoo. The market should sustain high single-digit spend growth in 2020 and 2021, given new console launches, the introduction of cloud gaming, expansion of esports and big mobile growth. In this market, Activision Blizzard should sustain its market share — if not expand share — given its favorable content line-up, release slate and expansion initiatives.
Thus, Activision Blizzard will likely maintain a ~10% revenue growth rate over the next few years. Profit margins should climb higher, too, as favorable demand drivers give the company pricing power, and big revenue growth drives positive operating leverage.
Putting that together, Activision Blizzard projects as a low-teens profit grower in 2020 and 2021. Assuming so, my modeling puts 2021 earnings per share at $3. Based on a historically average 22.5-times forward earnings multiple, that equates to a 2020 price target for Activision Blizzard stock of nearly $70.
Bottom Line on ATVI Stock
Calendar 2019 was a good year for Activision Blizzard. Calendar 2020 is shaping up to be even better. As such, while Activision Blizzard stock is up almost 30% in 2019, shares could rally another 15-20% in 2020.
As of this writing, Luke Lango was long ATVI.