Investors were thrilled with Activision Blizzard's (ATVI) latest earnings release. The stock shot higher following the report and crossed the $100 mark for the first time. Shares had been around $60 as recently as early 2020.
But it would be a mistake for shareholders to cash out on those short-term gains right now. The video game developer's quickly improving results aren't just side effects of the pandemic. In fact, Activision's business is getting more valuable in ways that should reward investors who hold on to the stock over the next several years.
Image source: Getty Images.
Not just a game
What Activision Blizzard has achieved in the past two years with the Call of Duty franchise has been phenomenal, even after accounting for the boost provided by the pandemic. The company took a popular but mature brand and refreshed it by pouring development resources into it, introducing the franchise to smartphones, and adding a free-to-play battle royale offering. All the extra development time also meant that they were never far from a quality, fresh content release.
The results speak for themselves, with the active gamer base soaring in 2020, average engagement hours hitting new records, and in-game spending shooting higher.
Activision can apply that same approach to other promising brands that it owns. In fact, CEO Bobby Kotick and his team are planning to apply what they called the "Call of Duty framework" to most of their other franchises in 2021 and beyond.
Even modest success here would leave the company with several additional massive brands that consistently generate at least $1 billion in annual revenue. Activision has a good shot at reaching an audience of a billion monthly users over time, more than double the 400 million it entertained this past year.
A strong business model
If you thought the increased reliance on free-to-play gaming might hurt profitability, take a closer look. Many of these gamers spend cash on microtransactions, and a large percentage of them upgrade to premium offerings in the brand. Fun in the Warzone ecosystem convinced many users to try out Black Ops Cold War, for example.
Activision is also seeing more spending across the board as engagement levels rise. Put these trends together and it's no surprise that profit margins are climbing. There's room for additional growth as long as the developer can keep gamers happily engaged with its brands.
ATVI Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
If you hold this stock over the next few years, you'll also benefit from a growing dividend payment and robust share-repurchase spending. Activision entered 2021 with nearly $9 billion of cash already on the books and debt that represented just about one year of adjusted earnings. Its latest 15% dividend hike was its 11th in a row, but there should be additional large increases in the coming years.
Entertain yourself
Activision's intellectual property portfolio is its biggest single asset. Any company would do well by marketing global powerhouses like Call of Duty, Diablo, and World of Warcraft.
But its recent results show that the developer also owns a powerful distribution platform that's nowhere close to done expanding into new demographics, markets, or monetization strategies.
These assets make Activision Blizzard an attractive growth stock that you'll likely be happy you've held for long after the business set new records in fiscal 2020.
