Too Late to Buy Activision Blizzard Stock?

Activision Blizzard NASDAQ: ATVI shares jumped more than 8% in after-hours trading yesterday on better-than-expected Q4 numbers. The video game publisher reported fourth-quarter net bookings of $3.05 billion, while analysts had expected $2.79 billion in bookings.

For full-year 2020, Activision Blizzard reported net bookings of $8.42 billion, well above the $6.39 billion reported in 2019. But the company is expecting just $8.45 billion in net bookings for full-year 2021, which would equate to an increase of less than 1%.

Activision Blizzard has been one of the biggest pandemic winners. Playing video games was one of the few recreational activities that was completely unaffected by the pandemic.

Shares are up more nearly 70% since the beginning of 2020 and the vaccine should return us to the old-normal by the second half of 2021. So, the question becomes:

Is Activision Blizzard tapped out?

 It isn’t. Here are 3 reasons why:

1. The Company’s Franchises are Beloved by Gamers

Activision Blizzard owns the Call of Duty, Candy Crush, and World of Warcraft franchises. These franchises are household names – even to non-gamers – and they are still growing. In its Q4 earnings release, Activision Blizzard said:

• The November launch of Call of Duty: Black Ops Cold War sparked a double-digit yoy percentage increase in net bookings for the franchise.
• “Candy Crush was once again the top grossing franchise in US app stores.”
• “World of Warcraft saw strong engagement across both the Classic and modern game modes throughout 2020, and full year franchise net bookings grew 40% year-over-year, reaching the highest level in nearly a decade.”

Shadowlands, the eighth expansion of World of Warcraft, was released in November. The launch sold more than 3.7 million copies globally on its first full day, which made it the fastest-selling PC game of all time. The expansion pricing started at $39.99 and went all the way up to $79.99. But the franchise doesn’t just bring in revenue when an expansion is launched; WoW players pay a subscription fee of $14.99 per month.

The company is more than those three franchises though. Before Shadowlands was released, Activision Blizzard’s own Diablo 3 was the previous record-holder with 3.5 million copies sold on its first full day. That game was released all the way back in 2012.

On the Q4 earnings call, Activision Blizzard announced that Diablo 4 – which some hoped would be released in the near future – will not be released in 2021. Ditto for Overwatch 2, the follow-up to the original Overwatch, released in 2016. These announcements put a damper on an otherwise strong year-end report, but when the follow-ups are released – perhaps in 2022 – they will give Activision Blizzard a nice company-wide boost.

2. People Will Play Video Games Post-Pandemic

The video game industry outlook was outstanding pre-pandemic. The industry has been rapidly growing for years. And it is expected to continue growing rapidly for years. According to Grand View Research, the global video game market was valued at $151.06 billion in 2019. It is expected to grow at a CAGR of nearly 13% from 2020 to 2027.

Goldman Sachs NYSE: GS analyst Michael Ng believes that exciting upcoming games will keep people playing video games a lot in 2021. He believes that the industry titans – including ATVI – still have more upside.

3. The Value is There

 Activision Blizzard is trading at around 28x forward earnings. You may be thinking: isn’t that too high with growth expected to grind to a halt in 2021?

ATVI is facing tough comps in 2021. The pandemic essentially squeezed two-years-worth of growth into one year in 2020. In 2022, ATVI’s top-line growth is expected to increase to low-double-digits. If the company can maintain that level of growth for a few years – which isn’t a lot to ask – shares could have a lot of room to run.

How Should You Play Activision Blizzard?

Activision Blizzard is set to gap-up to all-time highs today after spending the first five weeks of the year range-bound between around $88 and $96 a share.

It’s tempting to wait for a pullback, but you might not get it. The earnings report wasn’t that great, but it could lead to the discovery of the long-term value in ATVI shares. You might want to get into ATVI sooner rather than later.