After a dramatic fall to end 2018, Activision Blizzard (NASDAQ:ATVI) stock rose 28% in 2019. The maker of hit franchises including World of Warcraft and Candy Crush finished the year strong, with momentum across mobile, console, and PC titles. Notably, the company made a tremendous splash with Call of Duty Mobile, which has significantly expanded its audience reach and opens the door for lucrative monetization opportunities in the new year.

There are several small catalysts on the horizon that could add up to an even better year for the game maker in 2020. We'll review those as well as whether the stock's current valuation warrants further upside.

Several graphics of ascending bar charts overlayed on each other.

Image source: Getty Images.

Why the stock could climb in 2020

Activision Blizzard stock is still trading about 30% below its 2018 high. However, it ended 2019 with a series of upbeat news items about a few of the company's top franchises. The new mobile version of Call of Duty, developed by Tencent's TiMi studios, was downloaded over 100 million times in the first month after release and has a 4.8-star rating in the iOS app store.

The game includes a free rewards program (Battle Pass) that unlocks additional in-game content, but players can also progress through the Battle Pass tiers by purchasing Call of Duty points in the app. Activision Blizzard reported during its third-quarter conference call in November that monetization and player retention were looking strong. 

Additionally, Activision released the next installment for the console version of the franchise with the late-October launch of Call of Duty: Modern Warfare. Call of Duty is usually among the best-selling console titles every year, and 2019 will likely be no different. On the last call, management reported that first-week unit sell-through of Modern Warfare was up "high-teens" over the previous year's release. 

What's more, Activision has a solid pipeline of add-on content to monetize the game heading into 2020. During the last conference call with analysts, COO Coddy Johnson said the company has "more surprises and initiatives planned to further enhance the scale and value of the overall Call of Duty franchise in the coming quarters." 

Monetizing games with add-on content is a key revenue driver for Activision Blizzard, which generated 58% of its revenue in the third quarter from digital in-game sales.

Another title seeing strong performance lately is World of Warcraft Classic, which was released in August. Blizzard reported slightly higher monthly active users for the third quarter, driven by a significant increase in the number of prior and existing players who returned to the franchise. The investments the company has made to double down on development staff are really coming through for World of Warcraft, as Johnson mentioned that "the team is already starting to deliver an extraordinary cadence of in-game classic content." 

A screenshot of Activision Blizzard's upcoming World of Warcraft: Shadowlands.

World of Warcraft: Shadowlands. Image source: Activision Blizzard.

Activision Blizzard plans to capitalize on the momentum in these two pillar franchises with the launch of a Call of Duty esports league and the 2020 release of the World of Warcraft: Shadowlands content expansion. 

Esports is a 10-year project for Activision, so it's not expected to significantly contribute to the company's financials yet. But if the company reports continued success bringing in sponsors and advertisers for Call of Duty League and season 3 of Overwatch League, as it did last year, this could be another short-term catalyst that boosts investor sentiment.

Another possible near-term catalyst is upside from in-game advertising. This initiative is showing real progress, with net bookings from mobile ads in Activision Blizzard's King unit nearly doubling year over year in the third quarter. Management expects in-game advertising to exceed $100 million in net bookings in 2019, which means this business could approach $200 million next year if the recent pace of growth holds up.

Stock is expensive compared to peers

Those are some of the big items to watch this year, but these positives may already be priced into the stock. The shares currently sport a forward price-to-earnings (P/E) ratio of 23.5 and a price-to-sales (P/S) ratio of 6.56. That makes Activision Blizzard one of the more expensive gaming stocks right now across a range of metrics.

Metric Activision Blizzard Electronic Arts Take-Two Interactive
Forward P/E  23.56 21.94 24.62
P/S 6.56 6.20 4.34
P/FCF 25.11 19.47 12.24

Data source: Finviz and Yahoo! Finance. FCF = Free cash flow.

There could still be some upside for Activision Blizzard stock in the near term, as the shares continue to march their way back to the 2018 high of $84. It's also worth pointing out that over the last two console transition years in 2005 and 2013, Activision's stock performance was stellar. The share price rose 52% between the beginning of 2005 and the end of 2006 and jumped 90% between the beginning of 2013 and the end of 2014. This is likely because technology changes in the industry tend to bring more players into the gaming fold -- or at least get existing players more engaged, which bolsters game sales. The new consoles launching in fall 2020 from Sony and Microsoft could help Activision's stock performance, as previous console launches did in the past.

More catalysts beyond 2020

Looking beyond 2020, the big catalysts that could really get the stock moving are the releases of Overwatch 2 and Diablo 4. Given that Overwatch content has gotten a little stale in the last year, there should be plenty of pent-up demand for that release. The same goes for Diablo 4, which is a popular franchise but hasn't had a new release in more than seven years.

Overall, there are plenty of potential catalysts to push Activision Blizzard stock higher, but the stock's valuation may limit the upside.

Whichever way the chips fall in 2020, investors shouldn't fall into the trap of concentrating too much on a single year's performance. With a new console cycle about to kick off in the fall and promising growth opportunities across new games, esports, and advertising, shares of Activision Blizzard are a good bet for the next five years.