The gaming industry is interesting for investors as, according to Mordor Intelligence, it has an expected annual growth rate of 9.17% from 2020 to 2025, which relates to an approximately 151 billion USD market in 2019 to a predicted market of approximately 256 billion USD by 2025. Activision Blizzard, Inc. 94,42 0,00 0,00% (ATVI) is a company in the gaming and multimedia industry, known for games such as Overwatch, Warcraft, Call of Duty. Parts of the company already exist since 1979, however Activision Blizzard itself was founded via a merger in 2008 of Activision Inc. and Vivendi Games. In 2016 the company bought King Digital, known for the game Candy Crush. In addition Activision Blizzard is heavily involved in the growing E-sports community and is increasingly becoming a big player with a huge knowledge of the mobile gaming market, which is a growing segment in gaming. The company has broken many release records and is the biggest game company in the Americas and Europe in terms of revenue and market capitalization.
The company has a market capitalization of 58 billion USD, being the second largest company in the gaming industry, only Sea Limited out of Singapore is bigger. Activision Blizzard had a EBIT of 778 million USD in Q3 2020 (September). At the time of writing it has a share price of approximately 76 USD, and just before the COVID-19 outbreak it had a share price of approximately 63 USD. Activision has benefited a lot from the COVID-19 crisis which resulted in more engagement of its customers: more people stayed at home and having not much to do they reverted to (paid) entertainment and gaming. In part the revenues of the company come from the sale of new games, however a big part also comes from in-games sales, so it increases revenues when people spend more time gaming on the games they already own. ATVI has a dividend yield of 0.54%, that results in a dividend of 0.41 USD. ATVI is one of the few gaming companies that has a dividend, which makes it very attractive for investors. Looking at its dividend yield history, the yield actually has decreased, however because of the higher profit, ATVI actually pays out more to its investors. It has a beta of 0.65, this is quite the average for the industry. This means that the share is not very volatile compared to the Nasdaq nor is it an extremely risky investment.
Looking at the financial ratio’s it has a P/E ratio of 26.36, which is a bit lower than the average for the industry, however competitors with similar P/E ratio’s have higher share prices. It has a P.E.G. ratio of 1.10, which is higher than the preferred 1, however lower than the industry average.
ATVI current EPS is 2.85 USD per share and for next year the expected EPS is 3.54 USD. For the coming 5 years a growth of over 24% is expected. These are better growth numbers then peers in the industry, which is good news: when the EPS of a share increases, so does the value for investors.
The debt to equity ratio is 0.25 which is good as it shows that the company does not make a lot of debt to grow. It has a current ratio of 4.60, a bit higher then the industry average, but this is a good sign as ATVI can easily pay its liabilities in the short term.
The price to free cashflow ratio of ATVI is 30.18, much higher than the industries average of 21.49. This is a sign that ATVI might be overvalued. But looking at the statements in the Q3 2020 report, everything looks quite positive. However, ATVI has added almost 930 million of long term debt to the balance sheet, while it still had a positive free cashflow of 1.6 billion USD, resulting in a cash and equivalents end balance of 7.4 billion USD at the end of the quarter. Most likely the added debt was to boost earnings.
Better than the industries average is the company’s ROA of 10.90%. ATVI has a return on equity of 16.40%, which is better than many of their peers. It has a ROI of 9.50%, which is good but not great. It shows that ATVI maybe is not making the most efficient investments.
Finally, a technical analysis of ATVI: looking at the RSI index, which is 63.5, we see that it is pretty high and above the 40 preferred by investors, indicating that shares are overbought. The lines of the MA cross have crossed each other 8 months ago, however it is not likely to cross back over again any time soon, meaning that there is most likely still growth in the share price in the short term. The same applies for the MACD. Also looking at other analysis tools, it is obvious that ATVI, just like many other shares at the moment, are clearly overvalued.
Taking all this information into account, it is clear to me that ATVI has great ratio’s and a good future, with the gaming industry growing to over 250 billion USD market in 2025. However, the growth which the company now experiences during the COVID-19 pandemic, will most likely not last. Looking at the current share price, I think it is just too expensive, as before the pandemic its share price was around 63 USD and now approximately 76 USD. In addition to that, using the technical analysis, it is clear that the share is overbought and grew too rapidly. My advice would be to wait until the share price drops again, then buy it.
Max Ritt has over 4 years experience with trading and analyzing ETFs and shares. He predicted the economic implications of the election of president Trump and the BREXIT well ahead of others. Recently he started the MaxRitt.nl webpage where he blogs mainly about investing.
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