Activision Blizzard (NASDAQ:ATVI) shares hit new highs in February, only to slip 10% over the following weeks. After it posted impressive gains of 53% in 2020, is ATVI stock running out of steam?
Looking at the performance of the stock over the past year, the pattern looks remarkably similar to the trajectory of ATVI from 2016 to 2018. That run ended in a calamitous drop that punished investors.
Here’s why I don’t think we’re going to see a repeat of that 2016 to 2018 cycle this time. At least not any time soon. If my analysis is correct, this Portfolio Grader “B-rated” stock could be a winner again in 2021.
ATVI Stock Spikes on Killer Q4, Guidance
ATVI stock posted a big gain on Feb. 5, popping 9.6% in a single session. It followed that with several more days of gains, culminating with a $103.81 close on Feb. 12 — an all-time high.
The reason for the big movement was Activision Blizzard’s Q4 earnings, and strong guidance for Q1 2021. With the coronavirus pandemic pushing gaming to new levels of popularity, next gen video game consoles launched and killer new graphics cards for gaming PCs, Activision Blizzard had a monster quarter.
In a press release, the company said:
“In a year filled with adversity our extraordinary employees were determined to provide connection and joy to our 400 million players around the world … They accomplished this as well as generating record financial results for our shareholders. Under difficult circumstances, but with the same conviction and focus, they will continue to do so in 2021.”
Revenue of $2.4 billion for the quarter was up 21.5%, beating the company’s own projections by over $400 million. GAAP earnings per share of 65 cents handily beat both the company’s own projections and analyst estimates. The company noted successes like its Call of Duty franchise, which was bringing in 100 million active players per month across various platforms through 2020. That is double the engagement levels of 2019.
Activision Blizzard released full-year 2021 revenue guidance of $8.45 billion, edging past Wall Street estimates. It also hiked its dividend to 47 cents per share annually — a near-15% boost.
Naturally the market reacted positively to all this. As Markets Insider reported, KeyBanc immediately raised its price target for ATVI stock to $120 after the earnings report was released.
This Is the Start of a Cycle
The video game business is often a cyclical one. There is the usual issue over whether individual games are blockbusters or failures. However, added to that, game publishers can see business surge as new consoles are released, but then watch it shrivel as the hardware gets long in the tooth.
Looking at Activision Blizzard, the company’s stock was on a two-year roll through the fall of 2018, before dropping off a cliff. ATVI stock lost nearly 40% of its value in just two months.
However, for the past year and a half, shares rallied and in December, they surpassed 2018’s highs. Six weeks ago, ATVI stock closed at a record high. The pattern looks very similar to ATVI’s performance from 2016 to 2018. This time, we’re not going to see the big drop — at least not in the foreseeable future.
Why? In 2018, the Xbox One and PS4 game consoles were nearing the end of their life cycles.
With new consoles on the horizon, gamers were buckling down and saving up for big purchases ahead. Game developers were shifting resources to next-gen titles. A drop in business was inevitable. The Xbox Series X/S and PlayStation 5 launched last November, beginning a new cycle. The new consoles are going to fuel a game-buying spree for years to come. If Activision Blizzard can supply the titles gamers want, the growth trajectory for ATVI stock should continue.
Bottom Line on ATVI
What are investment analysts thinking when it comes to ATVI stock? It would be putting it mildly to say they are bullish on the company. The Wall Street Journal is tracking 31 analysts offering coverage of ATVI. They give the stock a consensus “Overweight” rating. Their average 12-month price target is $113.58, which offers a healthy upside of around 23%.
There are no guarantees, of course. Regardless of cycles, with development costs regularly in the hundreds of millions of dollars, video game companies can be sunk by one poorly received game release. That being said, everything is lining up for Activision Blizzard at this point. The 10% dip in ATVI stock since the post-earnings surge in February makes it even more tempting at this point.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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