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Is Activision Blizzard Stock a Buy?

By Ryan Henderson - Jun 9, 2021 at 7:15AM

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The video game publishing giant is on a roll. Can it continue?

Thanks in large part to the rise of its most notable gaming title, Call of Duty, game publisher Activision Blizzard (ATVI 0.35%) has seen a strong rise in its stock price over the last year -- up more than 30%. 

But as the reopening from the pandemic plays out and consumers spend more time socializing, investors seem uncertain as to whether or not Activision will be able to sustain its robust growth. Let's see if those concerns are warranted.

Group of people intensely playing video games.

Image source: Getty Images.

2020 at a glance

2020 was an exceptional year for Activision Blizzard. Led by the release of the free-to-play Call of Duty game called Warzone in March of last year, the company generated $8.1 billion in revenue -- a 25% increase from 2019. Additionally, Activision now generates more than half of its total net bookings from in-game content as opposed to game sales, which demonstrates that the lifetime value of its users can extend well beyond the initial purchase. 

But it wasn't just Call of Duty driving success for the company. King, Activision's mobile game developer responsible for hit titles like Candy Crush, drove home more than $2 billion in revenue and $857 million in operating profits for the year. While King's monthly active user count has steadily declined since its 2016 acquisition, King's focus on its most loyal gamers seems to be bearing fruit, since the average revenue per user has more than tripled.

The pandemic also helped Activision Blizzard reach record profitability as customers opted for digital solutions instead of hard-copy games, which helps reduce additional expenses like manufacturing and distribution. Sales from digital channels accounted for roughly 85% of overall net revenues in 2020 versus 79% two years ago. The increased digital-first focus helped each subsidiary under the Activision Blizzard umbrella deliver greater than a 35% operating margin. 

What's ahead?

Though 2020 was certainly a good year for Activision, the growth is showing no signs of slowing down. Call of Duty mobile reached 500 million total downloads during the first quarter, helping the company as a whole generate $2.9 billion in trailing 12-month free cash flow -- 103% more than the same period a year ago.

On top of the continued financial success, management gave investors a glimpse of the company's strategy moving forward. With Call of Duty tripling its player count over the last two years -- now totaling more than 150 million monthly active users across its range of game modes -- the title has established a blueprint for Activision Blizzard's other brands. 

By adapting a long-loved franchise to new systems, Call of Duty was able to dramatically expand its potential player pool, and now Activision wants to replicate that with its other games. CEO Bobby Kotick even mentioned on the company's latest conference call that "Call of Duty is the template we're applying to our proven franchises."

While the company has many long-standing franchises it could extend this model to, the first revival will be Diablo. The company is set to launch Diablo 2 later this year for PC and console, and Diablo Mobile is currently in beta testing. Each of these comes as a precursor to the long-awaited launch of Diablo 4, which is yet to have a release date.

A stock for the long haul

Although the company saw a boost in adoption from the pandemic, it looks like there's still a bright future ahead. 

The number of gamers worldwide is projected to eclipse 3 billion people by 2023 -- up from 2.7 billion in 2020 -- and the top-tier graphics on the next-gen consoles should bode well for higher-quality gameplay.

In addition, Activision seems to be in an advantageous position over its competitors. Building truly immersive gameplay isn't easy. It takes time, money, and a team of talented developers, and for smaller studios, those can be hard to come by. Activision demonstrated this when it stated that it's planning to hire 2,000 developers over the coming years to help build out its extensive catalog. 

At a market cap to trailing 12-month free cash flow of 25 times, along with an extra $5.9 billion in net cash on the balance sheet to invest back into the business, the decade looks quite promising for Activision shareholders. 

Ryan Henderson owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.

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