Activision Blizzard (NASDAQ: ATVI) it is one of the best performing stocks in the past two decades. More than 7000% since 2000, the video game conglomerate crushed the S&P 500, which returned about 169% in the same period. With its Triple-A console and PC titles, it has been able to consistently increase profits due to the staying power of franchises like Call of Duty and World of Warcraft. But with new gaming paradigms on the horizon, like virtual reality (VR), eSports, and the continued rise of mobile games, Activision will need to evolve to keep up with the times.
See how the business could be in five years.
Image source: Getty Images.
What will be different
In the past two years, the two major changes in games have been the growth in mobile devices (mainly games for smartphones) and the concepts of free-to-play Battle Royale as Fifteen days. Growth in these categories is expected to continue and Activision is preparing to adapt its business accordingly. In the past, the only way for a player to access Call of Duty was to buy a $ 60 game for your console or PC. Now with Call of Duty Mobile and War zone (The Fifteen days– as the battle royale game) available as free options, the company has created a three-pillar strategy, allowing players to choose how they want to interact with the franchise. So far, both titles have been a smashing success. Mobile reached 100 million downloads within 20 days of launch and War zone had about 75 million players this summer.
Management is calling it a “franchise-based strategy” and hopes to apply it to all of its games, not just Call of Duty. If they execute titles like five years from now Hearthstone, Diabloand Overwatch could have a much larger number of users than today.
In front of eSports, Activision Blizzard is working to build professional leagues for each of its franchises as another pillar to increase engagement with its users. They are very similar to professional sports leagues, with teams, owners and players, but instead of playing a sport, teams compete against each other in video games. For example, the Call of Duty The league has 12 teams competing for $ 6 million in cash prizes each year. The company makes money from sponsorships, ticket sales and broadcasting rights. It is a small part of the business now, but by 2025 eSports is expected to become a $ 2.7 billion industry. Activision will likely capture a large chunk of that pie.
Finally, with VR, investors may be concerned about switching from consoles to immersive glasses like Oculus, which is owned by Facebook (NASDAQ: FB)and how it could impact Activision’s user base. However, as long as Activision can transition its games to work seamlessly in virtual reality glasses, these new interfaces should really add to the company’s overall business.
What will be the same
Five years from now, you can be sure to bet that players will still want to interact with all the major Activision Blizzard franchises. They have consistently remained at the top of the charts for the past two decades, so you must ask yourself why the next five would be different. Players will still want to play first person shooter titles like Call of Duty and immerse yourself in RPG games like World of Warcraft.
You can also be sure that in 2026, Activision Blizzard will still pay a dividend and probably at a higher rate. Its current dividend yield is only 0.51%, but the payment per share has been increasing every year since 2010.
But is the stock a purchase?
Over the twelve months ending in September 2020, Activision generated about $ 2 billion in operating cash flow, a number that hasn’t changed much in recent years. With a market value of $ 73 billion, shares are now traded at about 36.5 times their previous cash flow, an expensive multiple for a reasonably mature company. However, if management is able to execute on its mobile, free-to-play and eSports initiatives, there are many monetization levers that the company can use over the next five years. Activision Blizzard doesn’t look like a noisy purchase, but there’s no reason to worry about owning shares here, even in a premium valuation.