Summary
Recently, ATVI’s stock price took a nosedive because of internal corporate scandals.
Despite the seriousness of the company’s situation, it is not likely to inflict permanent damage to the corporate fundamentals.
Even considering the high operating costs and reduced revenue growth caused by the delay of new games, the current market valuation gives an attractive buying opportunity.
My valuation based on DCF indicates the fair value is about $95, providing a significant upside potential of about 50% in the long term.
Mike Windle/Getty Images Entertainment 1. Investment Thesis
Data by YCharts Sometimes the stock market overreacts, creating investment opportunities for patient and shrewd investors, especially when the reaction comes from sentimental reasons. I believe Activision Blizzard ( ATVI ) is the case. The recent sell-offs result from the company’s harassment scandals, followed by more employees leaving the company. The increased concerns about the scandal and the delay of the upcoming games further result in downward pressure on its stock price.
The issues will indeed affect the fundamentals. For example, the difficulty in hiring the talented due to the evil reputation of an unhealthy work environment would prevent the company from reaching its full potentials. Nevertheless, the concerns overshadow the company’s track record in the game industry. Considering its core business, I believe ATVI is a good candidate for value investing, and my valuation shows it has about 50% upside potential. 2. Company Overview
2-1. Best Selling Game Franchises
Source: SUPERDATA
ATVI has been well known for developing and selling the best games worldwide for a long time. According to SUPERDATA, its games are ranked within the top 10 lists across the platforms. It fully demonstrates the company’s development capabilities and proves to satisfy gamers’ tastes worldwide. 2-2. Industry Tailwinds
Source: Gameindustry.biz
Video games are now one of the mainstream forms of entertainment. Thanks to the growing number of people enjoying them and various ways to play them, the video game industry is expected to expand further. According to GamesIndustry.biz, the total global games market size was about $174.9 billion in 2020. The growth has been strongly driven by games using mobile platforms, and mobile platforms hold the most significant shares of about 49.3% in 2020, increasing from 43.4$ in 2017. Source: Gameindustry.biz
With the performance of mobile devices and wireless networks with low latency, the mobile game environment has improved, and more gamers prefer playing games on mobile devices. The favorable climate will continue, according to Korea Creative Content Agency . As a result, the global game industry will grow at a CAGR of 8.7% from 2019 to 2022. Mobile will show the highest growth rate of 13.2%, followed by consoles at 9.1% and PCs at 6.4%. 2-3. Taking Advantage Of Industry Tailwinds
($ millions) Activision Blizzard King Mobile 456 63 1,830 PC 532 1,293 64 Console 1,971 90 – Activision Blizzard King Mobile 19.4% 2.7% 77.9% PC 28.2% 68.4% 3.4% Console 95.6% 4.4% 0.0% Net revenues by platforms for the nine months ended September 30, 2021
Source: 10-Q
ATVI is well-positioned to take advantage of industry tailwinds. As you can see from the table, ATVI has a well-diversified source of revenues across the platforms. Moreover, with best-selling games in each category, it will reap the fruits of the expanding industry in the future. 3. Recent Issues Related To Valuation
Lately, the dominant driver of the stock performance was the employee scandals despite the company’s strong operating history. Investors are concerned that an unhealthy work environment would make it hard for the company to keep employees engaged and productive, resulting in deteriorating businesses like the delay of new games.
However, I think the issues will not last in the long term. Furthermore, They’re not just ATVI’s issues, but an industry-wide one. The demand for a welcoming place to work to attract talented people will cause the industry to increase operating costs. The industry is highly competitive for employment, and human resources are critical components for success. So, ATVI will not be behind forever due to the employee scandals. The high standards triggered by ATVI for workplace cultures will apply to all industries, and peer groups will converge to a certain extent. 4. Valuation I tried to estimate ATVI’s fair value using DCF. I made two scenarios. One is a normal case representing the company not affected by the current situations. The other is the more likely case that reflects business performance affected by the internal problems. 4-1. Revenue Growth Rates Source: Created by the author I […]
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