We are maintaining our "buy" rating on Focus List selection Activision Blizzard Inc. (ATVI) and raising our target price to $122 from $102, explains Joseph Bonner, an analyst with Argus Research — a leading independent Wall Street research firm.
The fourth quarter topped off a remarkable year of strong double-digit revenue and profit growth for this large video game maker, which benefited from stay-at-home consumer behavior during the pandemic. The obvious investor debate is whether Activision can sustain these outsized results if and when the world returns to normal.
What we do know is that the latest releases from the company’s two most important franchises, “Call of Duty” and “World of Warcraft,” are performing well, either meeting or exceeding expectations. Management also believes that the company’s pipeline for both new games and game extensions remains robust.
Meanwhile, Activision is extending the reach of its franchise games with new forms of gameplay in casual/mobile, enabled by King Entertainment. The company spent years building out its digital infrastructure, which has now become critical to supplying the rising number of stay-at-home players.
The February 2016 acquisition of King Digital Entertainment catapulted Activision into mobile casual gaming, the fastest-growing segment of the videogame industry. Management sees opportunities in casual, particularly around advertising and in-game sales.
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 casual/free-to-play, downloadable content, e-sports tournament play, advertising, internet and television broadcasting, and consumer products.
Activision posted 4Q results on February 4 after the market close. The company beat the non-GAAP consensus revenue estimate by $264 million and its own guidance by $319 million. It also topped the consensus non-GAAP EPS estimate by $0.04 and its own guidance by $0.12.
We are raising our 2021 non-GAAP EPS estimate to $3.63 from $3.51 and establishing a 2022 forecast of $4.00. Our 2021 EPS estimate is above management’s guidance of $3.60. Our estimates imply a 7% increase in non-GAAP EPS, on average, over the next two years. Our long-term earnings growth rate estimate is 10%.
Management thinks that Activision, though one of the largest game developers, has only a 10% market share in a fragmented videogame industry. It also believes that videogaming is growing at about 20% per year, an extraordinarily high growth rate that, if sustained, would support significant growth at Activision.
While developing engaging game content is Activision’s primary objective, the company continues to move ahead with several strategic initiatives aimed at generating new revenue streams. These include professional e-sports tournament play and opportunities in advertising, broadcasting/pay-per-view, and consumer products.
COVID-19-related stay-at-home restrictions have clearly boosted videogame demand and user engagement, as Activision’s 4Q results continue to make clear.
On a forward basis, ATVI’s EV/EBITDA multiple of 19.4 is 10% above the peer average, less than the historical premium of 13%. We are maintaining our BUY rating on ATVI and raising our target price to $122.
