Gaming stocks have been on fire amid the novel coronavirus pandemic, and Activision Blizzard (NASDAQ:ATVI) has not been the exception to the trend. In fact, ATVI stock is up more than 12% year-to-date.
The idea is simple: Cooped-up consumers are increasingly entertaining themselves by playing (and spending money on) video games.
That said, recent strength in Activision stock will persist for the remainder of 2020 for three big reasons:
- A new generation of gaming consoles will release this holiday season. That said, Activision is in good position to benefit from these releases thanks to a strong 2020 content slate.
- Activision has increasingly and successfully adopted a shift to mobile gaming, where most of the growth in the video game industry is happening today. As this shift continues to play out in 2020/21, Activision will better align itself with mobile gaming tailwinds, and the company’s revenue growth trends will improve.
- Activision has huge upside potential in esports, with events like Overwatch League and Call of Duty League.
Overall, Activision has strong fundamental growth drivers over the next few quarters to few years. ATVI stock, below $70, still isn’t priced for those growth drivers. As such, this stock will keep powering higher.
New Console Releases
That’s a big deal for the video game industry. Additionally, it’s even an bigger deal considering that: 1) these new consoles will be the first generation of consoles with cloud gaming capabilities, and 2) they are launching on the heels of the coronavirus pandemic, during which video game interest, consumption and demand soared to new highs.
In turn, it’s quite likely that the video game industry will see an upswing in sales later this year.
Activision is in great position to benefit from this sales surge, thanks to the company’s strong 2020 content portfolio. For example, so far this year, the company will launch or has already launched a new season of Call of Duty: Modern Warfare, a new Call of Duty franchise game, Diablo IV and much more.
Therefore, behind this strong content slate and new console launches, Activision will likely see its growth trends meaningfully improve in the third and fourth quarters of 2020.
Strong Mobile Shift
Moreover, Activision has increasingly and successfully adopted a shift towards mobile gaming over the past few quarters.
For example, Activision launched Call of Duty: Mobile in October 2019 — bringing one of the video game industry’s most beloved franchises to mobile for the first time ever. It was a huge success, and represented one of the most successful video game launches ever.
This small victory gives Activision a strong blueprint to transition its other franchises to mobile in 2020/21, including World of Warcraft and Overwatch.
That’s a big deal because mobile is the epicenter of growth in the video game industry. According to Newzoo, total video game spending rose 7.2% year-over-year in 2019. In fact, mobile video game spend rose more than 11%.
Overall, as Activision increasingly adapts its gaming portfolio to the mobile world over the next few years, the company will better align itself with strong mobile gaming tailwinds. And as that happens, Activision’s growth trends in 2020/21 will improve.
Big Esports Upside
Longer term, Activision has tremendous upside potential through the esports vertical.
There is growing demand for video game streaming content, i.e. gamers watching other gamers competitively play video games. Over the past few years, video game publishers have aggregated this growing demand into organized sports leagues; Thus, giving birth to the world of esports.
Esports is still in its infancy. Over the next several years, viewership will grow by leaps and bounds. And as it does, so will the amount of advertising and sponsorship dollars flowing into the esports world.
That’s great news for Activision, who is widely considered the esports leader with its Overwatch and Call of Duty Leagues. As advertising volume ramps in esports over the next few years, Activision’s revenue streams from its various esports leagues will become meaningful. This, in turn, will provide a boost to what is an already robust long-term Activision growth trajectory.
Bottom Line on ATVI Stock
Thanks to rising video game interest, new console launches, a strong content slate, a successful mobile strategy and esports, Activision is positioned to grow revenues and profits at a healthy pace over the next several years.
My modeling suggest that this growth will lead to $4.50 in 2025 earnings per share. ATVI stock historically trades at 23-times forward. So based on that historically average multiple and a 10% annual discount rate, a fair 2020 price target for ATVI stock is north of $70.
Activision stock trades below that today, but the company has significant growth catalysts on the horizon.
That coupling ultimately means that ATVI stock remains a buy here.
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 various other analysts and platforms, 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, he was long MSFT.