Alongside the rest of the market, shares of video game publisher Activision Blizzard (NASDAQ:ATVI) have plunged over the past few trading days on concerns that the coronavirus from China will have a bigger negative impact on the global economy than previously expected. Since coronavirus fears hit financial markets in mid-February, Activision Blizzard stock has dropped about 7%.
But, recent weakness in the stock is actually creating a compelling buying opportunity for a few reasons.
First, Activision Blizzard makes video games, and the video game industry isn’t one that will be hit hard by consumers staying at home more. Second, the 2020 growth narrative for Activision has a ton of upside catalysts. All of those upside catalysts are still to come. Third, the valuation on Activision-Blizzard stock has dropped to levels which leave room for significant upside potential into the end of the year.
Net net, don’t let coronavirus fears chase you out of the stock. Instead, embrace recent weakness, buy the dip, and let improving fundamentals drive shares up towards $70 over the next few months.
Coronavirus Fear Are Overstated
First, it’s worth noting that coronavirus fears are broadly being overstated, and especially being overstated with respect to Activision Blizzard.
The coronavirus is a big, scary and volatile thing. But, it’s also an epidemic. And, like every other epidemic in the past fifty years, it will pass with time. Specifically, warmer weather coupled with strict quarantining, high consumer awareness, swift government response and rapid progress on a treatment will ultimately stop this outbreak within the next few months, if not sooner.
History tells us that the economic impacts of epidemics are constrained to the duration of the epidemic. So, with respect to the economy, the coronavirus will have a huge first quarter impact. And that’s about it. Come the second and third quarters of 2020, the economy should be back to normal.
Further, with respect to Activision Blizzard, coronavirus concerns seem especially overstated. The one very real global implication of the coronavirus is that consumers will likely stay at home more. That means that over the next few months, they’ll engage with at-home entertainment options more than maybe ever before.
In the modern era, the two biggest at-home entertainment options are streaming services and video games. So, consumers will likely be playing more Activision Blizzard games in the coming months. That’s a good thing, not a bad one, and in that context, the 7% drop in Activision Blizzard stock from coronavirus fears doesn’t make sense.
Multiple Growth Catalysts Coming
The Activision growth narrative in 2020 is pretty compelling, and the best of that narrative is yet to come.
Specifically, there are a handful of innovation catalysts this year that should spark supercharged awareness, interest and demand in the video game industry in 2020/21.
You have the introduction of the cloud gaming concept with platforms like Stadia. If nothing else, that will put video games in the headlines more often, and get consumers thinking about video games more. You also have the launch of the first new generation of PlayStation and Xbox video game consoles since 2013. Those platforms promise to have some breakthrough features, like cloud gaming and enhanced augmented reality capability. They should drum up quite the frenzy at retail stores in the back half of 2020.
With respect to Activision specifically, the company recently debuted the Call of Duty League, is planning on launching Diablo Immortal (a mobile version of Diablo III) and a World of Warcraft expansion soon. Also consider that it will likely launch Overwatch 2 and Diablo 4 at some point over the next 12 to 18 months.
Big picture — Activision and the video game industry will get their growth groove back in 2020.
Activision-Blizzard Stock Is Attractively Valued
All things considered, the recent plunge in Activision stock has pushed shares into attractively undervalued territory.
Activision’s revenues, bookings, margins and profits all dropped in 2019. But, these trends will reverse course in 2020 and 2021, supported by robust innovation in the video game industry and a strong content pipeline from Activision.
Assuming revenue growth over the next two years normalizes back to a historically average mid-to-high single-digit rate, and that renewed revenue growth drives positive operating leverage, then Activision should return to positive profit growth over the next few years. It should be no surprise, then, that fiscal 2020 consensus earnings-per-share estimates on Wall Street sit around $2.30, while 2021 estimates are up above $2.80.
Given the company’s strong momentum, I expect Activision to report a series of headline-beating quarters this year. Thus, when all is said and done, I think 2021 consensus profit estimates will move closer to $3 per share.
On average, over the past five years, Activision-Blizzard stock has traded at 23-times forward earnings. Based on that multiple and a $3 EPS estimate for 2021, then a reasonable 2020 price target for this stock is about $70.
Bottom Line on ATVI
Activision-Blizzard stock has been unfairly punished by coronavirus concerns over the past few trading days. The best thing investors can do at this point is to embrace this weakness, buy the dip and let fundamental improvements in the video game industry over the next few months carry the stock back to $70.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
