- The recent acquisition of King Digital has been a smart move by Activision.
- The recent drop in the stock price creates an opportunity to buy Activision Blizzard stock at an attractive price.
- The average target price of the top analysts is at $37.89, an upside of 16.9% from its last closing price (March 14), which appears reasonable, in my opinion.
On February 23, Activision Blizzard (NASDAQ:ATVI) completed the acquisition of King Digital Entertainment for $18 per share or $5.9 billion in cash. In my view, the acquisition of King has been a smart move by Activision Blizzard. The company now reaches over 500 million users across almost every country, making it the largest game network in the world. The acquisition gives Activision entry into mobile casual gaming, the fastest-growing segment of the video game industry. According to the company, it sees great opportunities to create new ways for audiences to experience their favorite franchises, from Candy Crush to World of Warcraft to Call of Duty and more, across mobile devices, consoles and personal computers.
Although Activision's latest quarter results were a bit disappointing, I see continued strong growth prospects for the company. On February 11, Activision reported its fourth quarter and full year 2015 financial results, which missed EPS expectations by $0.03 (3.5%). Revenue for the quarter declined to $1.35 billion from $1.58 billion a year earlier. Adjusted revenue was $2.12 billion, down from $2.21 billion last year, below the company’s forecast of $2.15 billion and also below the consensus estimate of $2.2 billion. The company missed its recent quarter results after delivering significant earnings surprises in its previous nine quarters, as shown in the table below.
Source: Yahoo Finance
Since the shift toward the digital distribution network is expected to continue, Activision is increasing its video game audience, as demonstrated by its initiatives in downloadable content, and internet and television broadcasting. Furthermore, its recent acquisition of Major League Gaming will accelerate its opportunities in eSports. Major League Gaming provides the company with a superb streaming platform, lead management expertise with the MLG Pro Circuit, and online competition and price plays through the GameBattles platform. According to the company, it believes that its investments in eSports fit perfectly with its strategy to deepen audience engagement by celebrating its players, delivering high-production values to its communities and providing greater opportunities for player investment. All in all, Activision expects to generate approximately $6.25 billion in revenues and over $2.0 billion of operating income in 2016, and it will have over 9,000 people making, marketing and selling its games around the world.
Activision Blizzard Valuation
Since the beginning of the year, Activision Blizzard stock is down 16.3% while the S&P 500 Index has fallen by 1.2%, and the Nasdaq Composite Index has lost 5.13%. However, since the beginning of 2012, Activision Blizzard stock has gained 153.7%. In this period, the S&P 500 Index has increased 58.2%, and the Nasdaq Composite Index has risen 79%. Nevertheless, considering its strong growth prospects, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of the top analysts is at $37.89, an upside of 16.9% from its March 14 close price, which appears reasonable, in my opinion.
Activision Blizzard stock is not dirt-cheap right now. However, considering its strong growth prospects, its forward P/E of 14.95 is not too high. The PEG ratio is at 1.15, and the average annual estimated EPS growth for the next five years is high at 13%.
In addition, most of Activision Blizzard's profit margin parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the table below.
Along with its fourth quarter results, Activision announced a 13% increase in its annual dividend to $0.26 per share. The annual yield is at 0.83%, and the payout ratio is only 18.9%. The annual rate of dividend growth over the past three years was 8.5%, and over the past five years was at 8.9%.
To summarize, Activision Blizzard now reaches over 500 million users across almost every country, making it the largest gaming network in the world. In my view, the recent acquisition of King Digital has been a smart move by the company. Despite disappointing fourth quarter results, I see continued strong growth prospects for the company. Since the shift toward the digital distribution network is expected to continue, Activision Blizzard is increasing its video game audience. Considering its high growth prospects, the recent drop in its stock price creates an opportunity to buy Activision Blizzard stock at an attractive price, in my opinion.