Since the start of 2021 Activision Blizzard (NASDAQ:ATVI) stock has lost one-third of its value. Shares that started the year over $90 trade today at around $60.
Blame is being assigned to CEO Bobby Kotick, and a long-running sexual harassment scandal he either ignored or covered up.
The stock’s fall went into overdrive when Blizzard co-head Jen Oneal, ATVI’s highest-ranking female executive, abruptly resigned. She had been in her position just three months.
Kotick has offered to take a huge pay cut and has absolute control over his board, but Microsoft (NASDAQ:MSFT) is now “reevaluating” its relationship with the company. This is seen as exerting pressure to force Kotick out.
While the scandal has bargain hunters calling ATVI stock oversold it may be time to take another look at its business model.
A Closer Look at ATVI Stock
For over a decade, video gaming has represented the ultimate in client computing.
Gamers bought the fastest machines, with Nvidia (NASDAQ:NVDA) or Advanced Micro Devices (NASDAQ:AMD) graphics cards. Game software constantly pushed the technology envelope.
Game development environments like Unity Software (NYSE:U), Roblox (NASDAQ:RBLX) and privately-held Epic Games’ Unreal Engine pushed development costs past those of Hollywood blockbusters.
There are now movie franchises based entirely on games, like Mortal Kombat and Resident Evil.
But as entertainment genres have merged, the technology has broken out of its box. Gaming has given rise to the “metaverse,” bringing it into office and online interaction.
Analysts confidently talk about the metaverse being a $1 trillion market before the end of the decade. Among the seen layers of this market, gaming is just an edge case.
Microsoft is now operating on every level of the new market. Facebook became Meta Platforms (NASDAQ:FB) to focus on the new market.
Activision Blizzard, which a few years ago was a big fish in the gaming pond, now finds itself a goldfish in the metaverse ocean. That spells trouble for ATVI stock.
Can ATVI Survive?
Given the new reality, Microsoft’s re-evaluation could force Kotick out. The company must then decide what it wants to be in the metaverse. Below Kotick, its executive talent is thin.
At its current market cap of $48 billion, Activision Blizzard is worth more than twice ViacomCBS (NASDAQ:VIAC). It’s still worth more than its chief rival, Electronic Arts (NYSE:EA). But EA has a host of new titles coming out next year, while ATVI’s have been delayed.
While game development budgets have grown, developers still rely on the fickle loyalty of game players for their revenue.
Many players are unhappy with policies Kotick helped develop, like charging for “add-on packs” and in-game purchases that drain their bank accounts.
Growth in some new segments, like e-sports, is slowing. ATVI’s expected 2022 growth is coming from titles that are being delayed.
The Bottom Line
The company Bobby Kotick built was a dominant video game publisher. It had control over its market. In the new business environment of the metaverse, ATVI is a niche player.
The scandals, and game delays, have knocked ATVI’s price to earnings multiple down to just 18. This is bringing in value investors as chart-watchers wait for signs of a bottom.
But the best reason I can see to buy ATVI stock today is arbitrage.
The company’s intellectual property might look nice inside Walt Disney (NYSE:DIS). Disney could spin out titles it has problems with and keep the talent to lead its own metaverse efforts.
Warner Discovery might like ATVI stock to water down AT&T’s (NYSE:T) stake. A bidding war could even bring Cloud Czars like Meta Platforms and Amazon.Com (NASDAQ:AMZN) to the party.
It’s speculative, but you could cash in on a Kotick cash out.
On the date of publication, Dana Blankenhorn held long positions in AMZN, NVDA and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
