This video gaming company continues to lead the sector with innovations to extend game life and increase player engagement.
Activision Blizzard Inc (ATVI)
From Argus Weekly Staff Report
We are maintaining our BUY rating on Focus List selection Activision Blizzard Inc. (ATVI). The February 2016 acquisition of King Digital Entertainment catapulted Activision into mobile casual gaming, the fastest-growing segment of the videogame industry. Apart from the ‘Candy Crush’ franchise, we think that Activision has gained access to King’s strategic talent. King should also bolster Activision’s presence in the fast-growing Asia Pacific market, which is ATVI’s weakest geographic segment.
Aside from King, Activision is focusing on broadening its videogame audience, as demonstrated by its initiatives in downloadable content, e-sports tournament play, advertising, internet and television broadcasting, and consumer products.
The company is also shifting its business strategy, first by extending game life and spurring engagement through periodic releases of additional downloadable content, and second by increasing digital revenue.
Activision is fighting the long-term secular decline in packaged games with increased online functionality. It is developing expanded, high-margin versions of its franchise games, developing ‘free-to-play’ games for that growing market segment (which has also been a focus at King), and introducing new game concepts.
Activision once again beat its own revenue and EPS guidance in 3Q17 (WSBI’s Editor’s note: the company earned $0.60 per share, beating estimates by $0.11), and we are raising our 2017 non-GAAP EPS estimate to $2.25 from $2.13 and our 2018 forecast to $2.48 from $2.40.
In our view, ATVI deserves to trade at a premium to peers based on the company’s industry leadership. ATVI shares have traded between $35 and $74 over the last year and are currently above the midpoint of that range. The shares have risen 75% on a total-return basis year-to-date compared to the S&P 500’s 17% gain; however, they have spent the last four months in a trading range in the low $60’s. The enterprise value/EBITDA multiple of 17.9 is near the peer median, though we believe that a higher multiple is warranted given Activision’s leadership in the fragmented gaming sector.
The company is well-positioned for the holiday season and 2018. We are maintaining our BUY rating on ATVI with a target price of $70.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, November 22, 2017