Buy Activision Blizzard Stock Ahead of Its Q1 Earnings Report

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With tens of millions of people stuck at home, consumers are turning more than ever to digital entertainment. And video games are seriously benefiting. Since Activision Blizzard (NASDAQ:ATVI) stock is not adequately reflecting this surge in demand for video games, investors should buy Activision Blizzard stock before the company reports its first-quarter results on May 5.

Quarantine May Not Move Activision Blizzard Stock the Way You'd Expect

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Video game sales started jumping in March, when the shutdowns were just getting started. The sector’s total sales soared 35% year-over-year in March, while video game software revenue climbed 34% YOY.

Activision is in a strong position to benefit from these trends. According to the research firm NPD, Activision’s Call of Duty: Modern Warfare was the top-selling game in 2020 through March and the most lucrative game in the 12 months that ended on March 31. Further, Activision reported that 50 million people have played its Overwatch game. Moreover, the company’s free-to-play Call of Duty: Warzone game has been accessed by over 50 million people.

There’s still more to like. Activision’s King Digital unit — the maker of the popular Candy Crush games for mobile devices — generates a significant amount of advertising revenue. As consumers spend more time at home playing Candy Crush on their smartphones, King Digital’s revenue should get a boost.

After all, several tech companies that rely on advertising, including Roku (NASDAQ:ROKU), Facebook (NASDAQ:FB) and Snap (NYSE:SNAP), reported relatively strong Q1 results, indicating that demand for digital ads remains fairly robust.

In 2019, King Digital generated total revenue of $2 billion, while Activision’s total sales came in at $6.5 billion. A 20% increase in King’s revenue would be $500 million, representing nearly 8% of Activision’s total 2020 sales.

Other Trends Are Favorable

Meanwhile, InvestorPlace analyst Matt McCall recently reported that “so many people have been playing video games that Microsoft’s (NASDAQ:MSFT) Xbox Live suffered a disruption in service. Sony (NYSE:SNE) had similar issues with its PlayStation.”

McCall also noted that, during the novel coronavirus pandemic, America’s major sports leagues are promoting eSports more than ever before. Further, even before the crisis began in Western countries, the eSports market was expected to jump 16% to $1.1 billion.

Activision has multiple sports games, and the company’s Blizzard unit is heavily involved in eSports. Consequently, Activision Blizzard stock should benefit meaningfully from the popularity of eSports.

The Market’s Expectations Are Low

Despite everything I listed above, analysts have low expectations. On average, analysts predict that Activision’s earnings per share climbed just 22% YOY to 38 cents.

Their revenue outlook is even more conservative — the mean estimate is $1.32 billion, just 5% above the $1.26 billion that the company generated in Q1 of 2019.

Meanwhile, Activision Blizzard stock has risen just 12% this year. While that performance is far better than the stock market as a whole, I don’t think it comes close to adequately reflecting the strong performance so far this year of the video game sector in general and Activision Blizzard in particular.

Bottom Line on Activision Blizzard Stock

Due to the pandemic, demand for video games has jumped. Meanwhile, Activision Blizzard’s games are extremely popular. Yet analysts don’t expect its financial results to surge very much this year. Given these points, the company’s Q1 results are likely to significantly beat the average outlook.

Further, since Activision Blizzard has risen only 12% this year and it’s trading at a reasonable forward price-earnings ratio of 27, shares are likely to rally in the wake of the company’s Q1 results.

As a result, I recommend that investors buy the stock ahead of the company’s earnings.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/buy-activision-blizzard-stock-ahead-of-its-q1-earnings-report/.

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