It’s a sign of how panicked the stock market was in March that even Activision Blizzard (NASDAQ:ATVI) took a big hit. In a little over two weeks, Activision Blizzard stock fell 18%.
That’s despite the fact that “stay at home” orders worldwide would seem to be bullish for ATVI, rather than bearish. And, as has been the case elsewhere in the market, investors eventually came to their senses.
Since March 20, Activision Blizzard has gained 44%. That includes a seven-session winning streak into, and out of, a strong first quarter earnings report last week.
With ATVI stock now at a 19-month high, some investors might believe the easy money has been made. They’ll be tempted to look for “cheaper” stocks elsewhere in the market that are trading at a larger discount to past highs.
Both moves would be a mistake. We’re seeing U.S. stocks rally on optimism toward a return to normalcy. And once we get to that point, I still believe this decade will become known as the “Roaring 2020s” for both the stock market and the economy.
In that scenario, Activision Blizzard stock remains a hugely attractive play, even at recent highs.
The Long-Term Case for ATVI
We know that demand for gaming is only going to rise going forward. Existing players spend longer in the industry. It’s not uncommon for consumers to keep playing games regularly into their 30s and 40s nowadays. Meanwhile, young generations continue to age into Activision Blizzard’s sweet spot.
Each year, then, the size of the gaming market expands. Demographics improve. Games get better. Multiplayer online games benefit from scale: the more players a game has, the more that want to join.
Simply put, gaming is a megatrend. As I noted last month, the industry is projected to grow 27% in just three years. Sales may top $300 billion by 2025.
eSports provide another driver, as Activision’s Call of Duty underpins one of the sport’s largest leagues. And in lieu of real-world sports, some organizations such as NASCAR have turned to virtual events, but indicate those pandemic-prompted shifts are just the beginning, rather than mere stopgaps.
That is all to say this is precisely the kind of industry where investors should want exposure. It’s growing, it’s durable; consumers won’t leave even in a recession. There are few, if any, entertainment purchases that drive more consumer value than a $60 video game.
A movie might cost $20 for two hours of viewing. An Activision Blizzard game could provide literally hundreds of times as much entertainment — for just three times the cost.
A Mid-Term Bounce
We have seen some stocks in the current market rally sharply on a short-term boost from the current crisis. Those stocks include protective equipment manufacturers such as Alpha Pro Tech (NYSEAMERICAN:APT) and the many biotechs like Inovio (NASDAQ:INO) pursuing coronavirus vaccines or treatments.
For the most part, I’ve tried to steer investors away from those one-trick ponies. But there are companies who will get a long-term boost from these short-term struggles — and Activision Blizzard is one of them.
After all, the company is adding new customers at the moment. No doubt, many former gamers who are now stuck at home have rediscovered their love for their favorite games. Others who never played are trying out Activision Blizzard games.
Indeed, in the first quarter release, Activision Blizzard noted that it saw “business momentum accelerating further in April.” And that momentum won’t end when this crisis does.
Activision Blizzard is picking up new subscribers for World of Warcraft. It’s introduced millions of gamers to the mobile version of CoD. Some of those users, admittedly, will move on once normalcy returns.
But many will stay for the long haul. And that adds a catalyst for a company whose chief executive officer already expected his user base to reach 1 billion by 2025.
Earnings Support the Case for Activision Blizzard Stock
Last week’s earnings release highlights the long-term case for ATVI. A user base that was closer to 350 million in November now sits well clear of 400 million (based on monthly active user figures).
Candy Crush, the crown jewel in the brilliant acquisition of King Digital Entertainment, continues to defy skeptics, who have argued for years that the game is heading for declines. I’m sure they’ll let us know when that does come to pass.
There’s even good news elsewhere. Electronic Arts (NASDAQ:EA) too posted a blowout quarter. I firmly believe that when Take-Two Interactive (NASDAQ:TTWO) reports at the end of this month, that company will also highlight the industry’s impressive growth.
Yet even after the rally, Activision Blizzard stock is not particularly expensive. The company increased its adjusted earnings per share outlook for 2020 to $2.62. This is a company that historically guides conservatively, so the actual figure likely will come in higher.
ATVI, then, trades well below 30x this year’s earnings. That’s a reasonable multiple for a defensive, long-term grower. And it’s a multiple that means the rally in Activision Blizzard stock isn’t over yet.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
