Activision Blizzard (NASDAQ:ATVI) is one of the best-performing stocks of the last two decades. Up over 7,000% since 2000, the video game conglomerate has crushed the S&P 500, which has returned around 169% in the same time period. With its Triple-A console and PC titles, it has been able to consistently increase profits due to the staying power of franchises like Call of Duty and World of Warcraft. But with new gaming paradigms on the horizon like virtual reality (VR), esports , and the continued rise of mobile gaming, Activision will need to evolve in order to keep up with the times.

Here's what the business could look like five years from now.

Young man holding a console controller while playing a game.

Image source: Getty Images.

What will be different

Over the last two years, the two big shifts in gaming have been the growth in mobile (mainly smartphone games) and the free-to-play battle royale concepts like Fortnite. Growth in these categories should continue, and Activision is preparing to adapt its business accordingly. In the past, the only way a gamer could access Call of Duty was to buy a $60 game for their console or PC. Now, with Call of Duty Mobile and Warzone (the Fortnite-like battle royale game) available as free options, the company has created a three-pillared strategy, allowing gamers to choose how they want to interact with the franchise. So far, both titles have been roaring successes. Mobile hit 100 million downloads within 20 days of launching, and Warzone had an estimated 75 million players this summer. 

Management is calling this its "franchise-based strategy" and hopes to apply it to all of its games. If they execute, five years from now, titles like Hearthstone, Diablo, and Overwatch could have much larger user numbers.

On the esports front, Activision Blizzard is working to build out professional leagues for each of its franchises as another pillar to increase engagement with users. These are similar to professional sports leagues, with teams and owners and players, but instead of playing a sport, teams compete by playing each other in video games. For example, the Call of Duty league has 12 teams that compete for $6 million in prize money each year. The company makes money through sponsorships, ticket sales, and broadcasting rights. It is a tiny part of the business right now, but by 2025, esports is expected to become a $2.7 billion industry.

Lastly, with VR, investors might be worried about a platform shift from consoles to immersive goggles like the Oculus, which is owned by Facebook, and how that could impact Activision's user base. However, as long as Activision can transition its games to work seamlessly on VR goggles, these new interfaces should be accretive to the company's overall business.

What will stay the same

You can be confident that five years from now people will still want to interact with all of Activision Blizzard's top franchises. They've consistently stayed at the top of the charts for the last two decades, so you have to ask yourself why the next five years would be any different. Gamers will still want to play first-person shooter titles like Call of Duty and immerse themselves in role-playing games like World of Warcraft.

The company's dividend also looks safe. Its current dividend yield is only 0.51% and the payout per share has increased every year since 2010.

But is the stock a buy?

Over the 12 months ending in September 2020, Activision generated around $2 billion in operating cash flow, a number that hasn't changed much over the last few years. With a market cap of $73 billion, the stock now trades at around 36.5 times its trailing cash flow, an expensive multiple for a fairly mature company. However, if management is able to execute on its mobile, free-to-play, and esports initiatives, there are a lot of monetization levers the company can pull over the next five years. Activision Blizzard doesn't look like a screaming buy, but there's no reason to fret about owning shares here, even at a premium valuation.

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.