With the shares of Activision Blizzard, Inc. (NASDAQ:ATVI) up about 83% during the past 12 months, there is some caution. You’ve got to wonder: Has most of the good news been baked in? Even worse: Perhaps ATVI stock is overextended?
It’s tough to tell. But then again, ATVI stock has been in a holding pattern since the summer, indicating that Wall Street is a bit antsy.
Keep in mind that the overall growth rate has not been particularly robust either. During the latest quarter, revenues inched up by 3.2% to $1.57 billion.
The valuation on ATVI stock is also far from cheap. Consider that the price-to-earnings ratio is at 47X (the market cap is a hefty $52 billion). This compares to 30X for Electronic Arts Inc. (NASDAQ:EA).
Granted, all these factors are worrisome. Yet I still think there is an opportunity with ATVI stock — at least for investors with a long-term horizon.
So let’s take a look at the pros:
ATVI Stock Advantage No. 1: Massive Scale
ATVI is one the world’s largest video game publishers. The company’s platforms have about 384 million monthly active users (MAUs) and the daily time spent per user is over 50 minutes, which is on par with mega social networks like Facebook Inc (NASDAQ:FB).
Because of this scale, the company has some major competitive advantages. One is that it has the resources to create franchise titles like Destiny, Call of Duty, StarCraft and World of Warcraft. But another advantage is that ATVI can pull off transformative acquisitions — a prime example is the deal for King.
The focus on franchises helps to capitalize on some major trends in the gaming industry. Note that players want deeply immersive experiences, which requires having top-notch talent and sophisticated systems. What’s more, with downloadable content and multiplayer options, a title generally has a long life. Oh, and with the rapid transition to video distribution, ATVI has enjoyed stronger margins because intermediaries like GameStop Corp. (NYSE:GME) have been cut out of the loop.
ATVI Stock Advantage No. 2: eSports
eSports is a competition among gamers, such as in tournaments, which can even be in stadiums. In fact, some of the top players have become quite famous and wealthy.
And yes, ATVI wants to get a piece of the action. A key part of this is the Overwatch League, which has a community of over 35 million registered users. The inaugural season began this month and there are 12 teams, which will play for a pool of $3.5 million in winnings. Already things have gotten off to a strong start and there has also been lots of interest from sponsors like HP Inc (NYSE:HPQ) and Intel Corporation (NASDAQ:INTC).
While the eSports industry is still in the early phases, it does look like it should provide growth for ATVI. According to the 2017 Global Esports Market Report, the brand spending is expected to jump from $517 million this year to $1.5 billion by 2020.
ATVI Stock Advantage No. 3: Mobile Power
In November 2015, ATVI agreed to acquire King Digital Entertainment for $5.9 billion. The deal for the mobile game operator was generally panned. The big knock was that the franchise Candy Crush Saga was beginning to fade. In the meantime, other games were not making up for the slack.
Yet the acquisition ultimately turned out to be a big winner. A key has been ATVI’s continued investments and moves to realize synergies.
Currently, King has two of the top-10 grossing games in the U.S. Of course, the Candy Crush Saga has been able to find ways to grow, having the No. 1 position on Apple Inc.’s (NASDAQ:AAPL) iOS and Alphabet Inc (NASDAQ: GOOG, NASDAQ:GOOGL) Android platform.
In terms of the financials, they are certainly robust. Keep in mind that gross bookings per playing user has increased for nine quarters in a row.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
