This Stock Has Soared 52%… With a Lot More Upside Ahead

ATVI stockSurging Online Gaming to Drive Activision Blizzard

If you have ever played Call of Duty, you probably know it is the legacy game for games developer Activision Blizzard, Inc. (NASDAQ:ATVI).

Whether you are a good player or not (I’m not), the reality is that the action-packed game has and continues to generate mind-boggling revenues for Activision Blizzard. The game launched in 2003 has seen over 250 million copies sold.

ATVI stock traded at a record high of $54.75 on May 5, 2017, up a sizzling 48% this year and 53% over the past year. With a beta of only 1.03 versus the 16.54% return for the S&P 500, Activision Blizzard stock has easily delivered alpha to investors.

The game changing strategic move by Activision Blizzard was its $5.9 billion decision to acquire hugely popular mobile games maker King Digital Entertainment PLC (NYSE:KING) in February 2016. Some of you may know the company’s core Candy Crush Saga game, which has a cult following.

But what was smart for Activision Blizzard was the online exposure King Digital presented. Digital revenues accounted for about 80% of first-quarter revenues.

With the addition of King Digital, revenue growth was a staggering 42% to $6.6 billion in 2016 versus a mere 5.9% in 2015. Gross margins are holding at the 63%–66% range.

As we move forward, Activision Blizzard will need to address its organic growth, which means growth excluding acquisitions.

After a 2.6% revenues contraction in 2017, growth is expected to jump to 9.8% to $7.06 billion in 2018. The drop-off in 2017 is due to the timing of new games. There is a high estimate of $7.57 billion for 2018, so there are some who are very bullish. (Source: “Activision Blizzard, Inc. (ATVI),” Yahoo! Finance, last accessed May 5, 2017.)

Let’s look at the quarterly results, where Activision Blizzard has beaten the consensus earnings per share (EPS) in 11 of the last 13 quarters.

In the first quarter, Activision Blizzard beat by $0.06 while also generating $1.19 billion in revenues, above the consensus $1.09 billion.

A deeper look shows the strong online presence as reflected in the table below. Note the strong online presence of King Digital.

 Company Total Monthly Active Users
Activision 48 million
Blizzard 41 million
King Digital 342 million

(Source: “Q1 2017 EARNINGS RESULTS,” Activision Blizzard, last accessed May 8, 2017.)

Impressive ATVI Stock Chart

The long-term price chart of ATVI stock is a thing of beauty, especially if you were fortunate enough to have bought the stock when it was trading at below $1.00 in 1994.

ATVI Stock Chart

Chart courtesy of StockCharts.com

Here is the story of a penny stock that has actually produced real results for investors.

ATVI stock made a major move in December 2016 when it broke higher at $36.00 from a bullish double bottom formation.

ATVI stock

Chart courtesy of StockCharts.com

The chart shows a big upside trading gap in mid-February when ATVI stock surged from $39.00 to around $47.00, followed by the emergence of a bullish golden cross in early March that led to the recent breakout at $50.00.

The upside move in Activision Blizzard stock was accompanied by strong relative strength from February to March, and recently in late April.

A sustained break could drive ATVI stock toward $60.00 to $70.00 over the next year.