Activision Blizzard: Loyal Player Base Suggests Further Upside

Activision Blizzard (ATVI) is the most valuable video game company in the U.S., boasting a market cap of $63.2 billion.

The company features one of the most diversified portfolios of video game titles in the world, including iconic franchises such as Call of Duty, World of Warcraft, and Candy Crush. The business is split primarily into three segments, Activision, Blizzard, and King, which contribute more or less equally to total revenues.

The COVID-19 pandemic has further boosted the company over the past couple of years; bolstering its user base, and enhancing its cash-flow consistency.

Simultaneously, the stock remains reasonably valued, with robust growth prospects. I am bullish on the stock. (See ATVI stock charts on TipRanks)

Loyal Player Base Leading to Solid Cash Flows

One of Activision Blizzard’s greatest qualities is its ability to retain a very consistent player base among its titles. While many titles in the market tend to be played once, with no further value to provide to players, ATVI’s titles are able to keep players occupied for months, even years, past their initial release.

The company is able to leverage its stable player base to extract consistent and robust revenues quarter-over-quarter. A great example can be seen in Activision’s revenues, which had declined significantly in 2019.

However, since transforming its Call of Duty franchise into a game-as-a-service, the division’s revenues became much less volatile due to its now-stable player base.

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Reasobaly Valued Company, Solid Growth Prospects

While Activision Blizzard enjoys steady cash flows from its existing titles, the company has various growth avenues. These include organic growth, launching new titles, and acquisitions.

For instance, King’s revenues grew 15% year-over-year in Q2. Candy Crush continues to grow in popularity, despite once again being the highest-grossing game franchise in American app stores.

The company also has $9.2 billion of cash in its balance sheet and only $3.6 billion in long-term debt. Should any potential acquisition opportunities arise that could accelerate growth, it’s safe to say that management has enough firepower saved to take advantage of them.

Considering the company’s predictable revenues, sky-high net margins that often exceed 25%, and solid growth prospects, the stock’s forward P/E of around 18.43 likely undervalues its potential.

Wall Street’s Take

Turning to Wall Street, Activision Blizzard has a Strong Buy consensus rating, based on 15 Buys, two Holds, and zero Sells assigned in the past three months. At $114.25, the average ATVI price target implies a 40.6% upside potential.

Overall, hardly any other company can claim the quality and size of Activision Blizzard’s player base, the consistency of its cash flows, and possible upside — not only from a valuation expansion standpoint, but from a future growth potential too.

The company is also paying a dividend on an annual basis. While it is currently providing only a tiny yield, it has the potential to grow massively due to its very comfortable payout ratio, which currently stands under 15%.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article

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