Today we have a speculative idea: take stock of game maker Activision Blizzard (NASDAQ: ATVI) based on their rebound after a strong fall.
Growth potential and validity: 22% behind 17 months excluding dividends.
Why stocks can go up: they fell hard, and the company's business is strong.
How do we act: we take shares on 57,28 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
We have already published an investment idea for Activision Blizzard - it's time for a new one.
The company develops and sells video games. Surely names like Call of Duty or World of Warcraft will seem familiar to someone.
According to the annual report, only 30% the company's proceeds are given by the sale of its products. Other 70% fall on subscription, licensing and other intangible assets.
Arguments in favor of the company
Fell down. This year, the company's shares have fallen in price by almost 45% — with 103,81 $ in February to 57,28 $. This happened mainly against the backdrop of scandals with the company's corporate culture., but, given the circumstances, described below, I think, that we can count on a rebound in stocks after such a strong fall.
Still working - and how. Business of the company, objectively speaking, looks better now, than a few years ago, and revenues and profits increased significantly. This alone should contribute to the rise in quotations..
At the same time, the business environment for the company is excellent.. And without the coronacrisis, everything was fine for gaming companies: the future economic prospects for new generations of Western countries were getting worse and worse. And with the coronacrisis, a solid “Black Mirror” began at all in the format 24/7 all year round. People will play more and more - and therefore spend more time in the virtual world. Compared to other forms of entertainment, which are becoming more inaccessible, like traveling abroad, games look like cheap and fairly high-quality entertainment.
ATVI will be able to play on the widely publicized topic of the metaverse in the future: she has, like a game company, have the necessary skills and experience to, to get a practical implementation of this concept, which will bring money. And it will allow you to pump up quotes at the expense of investors who are greedy for such things..
Mobile phones. The future of the gaming business lies in mobile games: they are simple, cheap and therefore extremely cost-effective. And the example of ATVI itself confirms this.. For the first 9 months of 2021, the operating margin of King Mobile alone is 46,47%. This is noticeably more, than Blizzard units - 38,13% — и Activision — 38,06%, who deal mainly with non-mobile games.
All in all, ATVI has a very strong mobile gaming segment - and not just King, but in general everything, what the company does for mobile platforms. And the role of this segment in the company's business is gradually growing.. Following the first 9 months of 2021 he gave already 40% proceeds, for the same period in 2020, its share was 35,11% - and this is already noticeably more, than in 2018, when its share was about 29% from the company's total revenue.
Important to consider, that in the mobile segment reporting, ATVI also considered sales of physical goods related to its products, which somewhat spoils the understanding of, how much exactly the company is doing on mobile games.
Quite possibly, that the success of the mobile division of the company in the future will be the locomotive of its business and will contribute to the influx of investors in its shares. A strong mobile games division sets the company apart from competitors from Electronic Arts and Take-Two.
Cheap. The company is significantly cheaper than its closest competitors. P / E for ATVI is 22,96 - for comparison: у Electronic Arts — 45,91, а у Take Two — 34,2. Taking into account the working, a successful business, this allows us to consider ATVI undervalued and favors the growth of its shares.
Can buy. Considering all of the above, the company may well be bought. For example, Microsoft can do it. The new owners of the company will rebrand and clean up the ranks, that will get rid of the negative, associated with the tarnished reputation of ATVI. But effective, a well-established business and the strongest franchises - and each can be milked into revenue for many, many years - all this makes ATVI an attractive target for acquisition, given the strong fall in the value of the company's shares.
Dividends. The company pays 0,82% annual - 0,47 $ dividends per share, what she spends 365 million dollars a year is just 13,82% from her profits for the past 12 Months. She's good with bookkeeping.: there are 7.027 billion in arrears, of which only 2.016 billion need to be repaid during the year. Moreover, all debts are more than paid off with money at the disposal of the company - it has 9.718 billion in accounts.
It seems to me, the company may well, without prejudice to its financial health, increase dividends three times as much in order to, to placate shareholders. Maybe, even it is attacked by some activist investor - just in order to demand dividend payments. Don't count on multiple payouts., but it is quite possible in the current circumstances: such a move will allow pumping up quotes due to the influx of fans of passive income.
Maybe, such an activist will also push the company for sale in order to rebrand.
What can get in the way
It didn't just fall. For almost half a year the company has been shaking from scandals, related to toxic corporate culture. The problem with this latest scandal is, that it still does not end in any way and can take on rampant proportions: from a full-fledged strike of workers, potentially large fines and compensation payments, which companies can be ordered by the court, before sanctions from partners and investors.
Actually, it already happened: nothing else, except by the blockade of the ESG lobby, the drop in the company's shares cannot be explained. And now there are reports of, that Microsoft may reconsider ties with ATVI, which will inevitably affect the revenue of the latter - after all, ATVI has 11% selling. Yes, there is a high probability, that other partners of the company can do something similar: Sony, Apple и Google.
This scandal could culminate in a quick and drastic cosmetic change in the form of a management reshuffle - something that investors may welcome.. Or maybe, and no, and the scandal will continue: shares will fall even lower, and this whole story will begin to affect the company's operations directly in the form of a delay in the release of games and a drop in the quality of programmers' work.
Maybe, even everything will come to the ostracism of the company by the players, what will affect sales. The main problem with this scandal is, that he does not subside and does not let go of ATVI, significantly affecting its quotes. All in all, there are many unpleasant probabilities.
The very campaign of persecution of ATVI, without regard to the most powerful foundation of its business, indicates that, that purely operational factors such as revenue, profits and margins are no longer so important for investors, how to follow ethical principles.
The same bullying campaign may provoke ATVI management into adventures., which will lead to the deterioration of its financial condition. For example, she might fork out to buy some money-losing startup like Zynga or Unity Software in a vain hope, that this will help investors forget about the problems inside ATVI. But, how did we make sure, investors don't want to forget this story, and the financial damage to ATVI could be very significant.
What's the bottom line?
Shares can be taken now by 57,28 $. Think, during the next 17 months they will return to the mark 70 $.
And if you have already taken these shares with a view to the long term, now you can buy them.
