Sales of video games exploded in 2020, climbing nearly 20% to $175 billion, according to market researcher Newzoo. More players are engaged with games than ever before, which is great news for Activision Blizzard (NASDAQ: ATVI), as it has some of the most enduring franchises on the market, including Call of Duty and World of Warcraft.

While the availability of COVID-19 vaccines could be a threat to continued high player engagement in 2021, Activision Blizzard expects to keep growing the business this year, with a focus on execution. Plus, there could be a few surprises that investors are not expecting from new releases. But beyond the near term, investors are still not properly valuing the long-term growth potential this top game company offers.

A man's hand holding a video game controller.

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Activision Blizzard is not hitting on all cylinders

With management guiding for bookings and non-GAAP earnings per share to grow by 27% and 33%, respectively, for 2020, you would think Activision Blizzard is firing on all cylinders and can't perform any better. But consider that this record year is primarily based on stellar performance from a single franchise -- Call of Duty.  

The company disclosed in December that Call of Duty, including its free-to-play titles and premium releases on console and PC, generated $3 billion in net bookings over the last year. That's 37% of Activision Blizzard's expected total bookings for 2020. 

But this is just the tip of the iceberg. The company has been so busy working on the upcoming Overwatch 2 that the original title hasn't received much new content for players to enjoy over the last few years. Despite selling 50 million copies since its release in 2016, Overwatch only has 10 million monthly active users. 

Overwatch 2 will introduce a substantial amount of new content, similar to the World of Warcraft expansions that Blizzard releases every few years. This new content will appeal to players who have grown tired of the exclusive focus on the multiplayer game mode that the first Overwatch centers around.

Let's also remember that the Diablo franchise is about to get a makeover, too. It hasn't had a major release on PC since 2012 when Diablo 3 broke sales records. In addition to the upcoming Diablo 4, Blizzard has an underappreciated growth opportunity with the mobile version Diablo: Immortal, produced in partnership with Chinese game developer NetEase (NASDAQ:NTES). This mobile release could significantly grow the audience for this classic PC title.

During the third-quarter conference call in late October, management reported that the internal testing of Diablo: Immortal received a "hugely enthusiastic response." That is great news, because the original announcement of this game at BlizzCon in 2018 received a negative response from Blizzard fans. As a result, investors have largely written off how impactful Immortal could be for Blizzard's bottom line, especially when combined with the potential to upsell players who download the free mobile game to try Diablo 4 on PC. 

We don't know when Overwatch 2 or the new Diablo titles will officially launch. But during the third-quarter conference call, CFO Dennis Durkin hinted that more growth is in store in 2021: "Successful execution against our plans would position our segments to build on the aggregate performance reflected in our revised 2020 outlook."

Massive growth potential

As great as Activision Blizzard performed in 2020, investors haven't seen the full potential of the company. Activision Blizzard won't truly get into gear until Overwatch, Diablo, and other franchises receive the Call of Duty playbook.

Moreover, what many investors may not realize is that Activision Blizzard has a deep library of titles. The company owns a portfolio of intellectual property going back decades, and management has hinted it has a long-term plan to monetize that.

Speaking on the recent success of Call of Duty, here is what CEO Bobby Kotick said during the second-quarter conference call last year: "As the world starts to reopen, we believe these actions have delivered a true structural change in the trajectory of our largest franchise, and this is the road map we plan to follow for the many franchises we have in our library, which dates back to 1980."

With the worldwide audience for games expected to continue growing around 5% per year, reaching 3 billion players by 2023, Activision Blizzard has the gaming brands, marketing capabilities, and resources to deliver double-digit annualized growth for many years.

At a forward price-to-earnings ratio of 26 based on next year's earnings estimates, Activision Blizzard is undervalued when considering the opportunities it has to continue improving existing games -- not to mention the potential to surprise everyone with the introduction of a wholly new franchise(s) in the next decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.