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ANALYSIS: Is This $36B Video Game Stock A Good Investment Right Now?

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Investing in stocks is tricky. But what if you get a stock that has been pummelled over the course of this year and still remains a market favorite? You would want to get in.

Leading gaming company Activision Blizzard [ATVI] is one such company. Shares are down 26% in 2018. Stocks of major gaming companies have also depreciated considerably this year. Electronic Arts (EA) has slipped 20% this year while Take-Two Interactive (TTWO) is down over 3%.

The largest gaming company in the world (Tencent [TCEHY]) has lost almost a quarter of its market value (amounting to a whopping $125B) year to date.

These gaming companies have had a stellar run over the last few years. This market correction has been long overdue and shares are now trading at conservative multiples.

Activision Blizzard shares are trading at $46.52 a share which is 45% below its 52-week high of $84.68. Since the start of October, shares have declined over 44%. With a relative strength index of 27, Activision Blizzard shares are trading well into oversold territory.

The share is trading just above its 52-week low. Activision shares were at these levels way back in February 2017. The stock has grossly underperformed broader markets and burnt significant investor wealth. However, this pullback in shares provides investors with an opportunity to enter the stock.

So why do you need to invest in the stock? The fundamentals are strong. Activision Blizzard has significant upside potential with robust earnings growth driven by expanding profit margins. Let’s have a look at each of these metrics.

Activision Blizzard has bottomed out

Activision Blizzard shares were impacted by the mind-boggling success of Fortnite. Activision’s latest “Call of Duty: Black Ops 4” title generated $500 million in the first weekend of its launch. While this is mighty impressive, the “Call of Duty: Black Ops 2” saw sales of $500 million in the first 24 hours since its launch.

Investors and analysts were expecting a similar response and were left disappointed. It also reported a fall in monthly active users (or MAUs) from 384 million in Q3 2017 to 352 million in Q3 2018. All of these factors sent the stock spiraling downwards.

It certainly seems that Activision Blizzard shares have bottomed out and are set to take off on their next bull run. All the recent events have been priced in that has led to this massive decline. So what will drive the stock upwards?

Activision Blizzard is one of the premier gaming companies with a market cap of $35.5 billion. Yes, there are other companies such as Electronic Arts (EA) and Take-Two Interactive [TTWO] that are direct competitors, but with a solid portfolio of franchises, Activision Blizzard can easily hold its own.

Despite the recent pullback, Activision Blizzard has created significant value over the years. It has risen 173% in the last five years and 400% in the last ten.

Strong gaming portfolio

The company has time and again released blockbuster franchises over the years. Though “Call of Duty” is Activision’s flagship franchise, it has other vastly popular games such as “World of Warcraft,” “Star Craft,” “Destiny Overwatch,” and “Hearthstone.” Yes, the recent “Call of Duty” game was not as well received as expected, but $500 million sales in three days is still mind-blowing.

Activision also acquired King Digital way back in 2015 for $5.9 billion to enter the digital and mobile gaming space. King Digital’s portfolio includes “Candy Crush,” “Bubble Witch” and “Farm Heroes.” The move into digital has resulted in a stable stream of recurring revenue for the firm.

Despite the fall in monthly active users, Activision Blizzard stated that the average user still spent 52 minutes gaming daily — an all-time high. It also has seven of the top 20 most viewed games on the industry’s largest streaming platform.

In-game purchases crossed $1 billion in sales for the third consecutive quarter.

The strategic shift toward eSports

Activision Blizzard has also been one of the first movers into the high growth eSports vertical. “Overwatch” found major success, and Activision Blizzard signed multi-million dollar deals with broadcasting partners such as Amazon’s [AMZN] Twitch.

It has now added six new teams bringing the total number of teams to 18. The eSports industry is still at a nascent stage and will be growing at double digits over the next few years.

The eSports industry has opened up opportunities in verticals such as advertising and licensing as well.

High growth industry

The global games industry is a high growth one and is estimated to rise from $138 billion in 2018 to $180 billion by the end of 2021. The mobile gaming market will lead growth and rise from $70 billion to $106 billion in the forecast period.

It’s very likely that King Digital’s mobile portfolio will lead this growth, gain traction and expand revenue over time.

So what’s next?

Activision’s revenue has risen from $6.6 billion in 2016 to $7.15 billion in 2017. Analysts expect sales to rise by 4.4% to $7.47 billion in 2018, 3% to $7.7 billion in 2019 and 8.9% to $8.37 billion in 2020.

The shift towards digital gaming has massively driven profit margins for Activision Blizzard upwards. The operating margin for gaming firms is similar to those of traditional software companies.

Here’s what the experts say

With the recent price drop, institutional investors hold 93% in ATVI stock. Out of the 27 analysts tracking Activision Blizzard, 20 recommend a “buy” while seven recommend a “hold.” There is not a single “sell” recommendation.

The analysts have a low target price of $56 while the high target price is $93. The 12-month average target price stands at $73.69, indicating an upside potential of 58.4% from current levels.

Institutional investors are betting on Activision Blizzard. And you should too.

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Stock Market Turbulence: 4 Ways To Mentally Prepare

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From October 1 to November 23 last year, the NASDAQ fell nearly 14% and the S&P 500 fell 10%.

Ouch!

Then over the last week in November, the S&P 500 rebounded 5%.

Whew!

Then it tumbled again, and wiped out its gain for the whole year.

Feel whipsawed? Sure.  We all do. It’s in our brains. The financial markets are only a few centuries old, but our brains are much older — and they were “built” by evolution, not by Apple or IBM. When fear strikes, as it does during a downturn in the market, our evolved instincts tell us to run, same as we would from a fire, a flood or a predator. Applied to the stock market, our primordial urge is to sell, and preserve what we have.

But that urge is hopelessly wrong.  It’s a false alarm, and a disastrous “choice” that can dwarf your portfolio forever. Both naïve and ostensibly savvy investors alike may obey that primitive instinct, cash out their portfolios with sighs of relief, and live to rue their decision. The day will come when the market comes roaring back, making new highs, as they cling to the proceeds of unwise sales, wondering when to buy back in — usually too late.  There’s a very expensive lesson in this: the people on the other side of those trades were wiser.

In Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich relate the cautionary tale of a broker’s experience in the 1987 stock market turbulence.  Over a hundred young clients called to sell all or part of their portfolio, hoping to stanch the bleeding. But two old hands over 80 called to buy. Experience beats intelligence.

How can we still our throbbing hearts as markets reverse or even tank, so we don’t sell in haste and regret it during the next market boom? Use the cultural wisdom already downloaded into your consciousness to mentally prepare for stock market reversals:

1. Listen to FDR.

“The Only Thing We Have to Fear is Fear Itself,” Franklin Delano Roosevelt said in his 1933 inaugural address. FDR was speaking to the nation about The Great Depression, then at its depth after the 1929 stock market turbulence. Master politician, master crowd psychologist, and member of the wealthy elite, FDR knew his history. He knew that prosperity would return in time, as part of the natural ebb and flow of markets and economies — if the sociopolitical consequences of the Great Depression could be held in check.  In 1933, as in any market reversal, fear was his worst enemy.

2. Heed an ancient adage — and Lincoln.

“This too shall pass” is a renowned Persian, Hebrew and Turkish adage often misattributed to the King Solomon in the Bible. According to Sufi poets, the phrase was a passage etched upon a king’s ring. It was there to make him happy if he were sad and, sadly, to caution him that joy, too, is fleeting. But the most compelling recital of the phrase comes from President Abraham Lincoln: “It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”

3. Think like a mathematician.

“Invert, always invert,” said the mathematician Carl Jacobi. Mathematical inversion is a favored thinking tool for both Charlie Munger and Warren Buffett. It flips life’s problems up, down, around and backward until the answer presents itself unbidden. Buffett says, “It’s like singing country western songs backward. That way you can get your house back, your auto back, your wife back, and so forth.”

How can inversion be applied to market downturns and crashes? Invert the naïve impulse to sell into an informed decision to buy. Recognize that if you are wise enough to hold onto stocks for the long term, the price anyone would pay for them in a downturn is irrelevant. If you have wisely stored a cash hoard in anticipation of a downturn, you are not obliged to sell stocks in a down market to harvest cash. And because you are free to buy, the stocks are on sale! Buffett teaches: “Be fearful when others are greedy, and greedy when others are fearful.” But take caution not to buy too soon. Wait until the market bottoms, or in Wall Street parlance, “Don’t  try to catch a falling knife.”

4. Shakespeare was right.

Cowards die many times before their deaths, The valiant … but once,” wrote William Shakespeare. If you fear the market and keep most or all your money in cash or cash equivalents, inflation will, in the fullness of time, destroy your cash hoard. It’s financial death by a thousand inflationary cuts. Though the nominal two percent inflation rate is hardly noticeable day to day or even year to year, compounded over six decades, a dollar is only worth a dime.

If you are wise enough to invest, not play the market or buy and sell, but be brave and hold a steady course through storms and routs, diversified and shielded from taxes in a retirement account, you will find yourself a hero at retirement.  And, moreover, to your survivors when you are gone.

This article originally appeared on ValueWalk. Follow ValueWalk on Twitter, Instagram and Facebook.

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Investing In Stocks: 5 Rookie Mistakes To Avoid At ALL COSTS

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There’s something about capital markets that captivates everyone: Some think stocks are an easy way to make a quick score. Others, on other hand, liken stock to gambling.

And then there are some who just don’t have a clue about stocks at all.

(Fret not, #WealthGANG, we’re here to serve!)

But why is the stock market so fascinating? What causes people to be completely overawed by it?

Despite the many myths, it is extremely easy to trade in the markets; you can actually get started on your smartphone for less than $10.

But to trade stocks successfully? Now that’s another story—despite what those in-their-20s Instagram crypto money managers and scammers want to tell you.

For all the myths, biases, (mis)beliefs and misconceptions, you can still hedge your bets by following a disciplined blueprint. In this case here, we will share with you what not to do.

Here are X common investor mistakes to avoid at all times.

Mistake #1: Thinking you can make a quick buck from Wall Street

This is probably the single biggest misconception about the stock market. Investor legends like Warren Buffett always maintain you need to invest over a long-term horizon to book big profits.

And even if you have stories like the ‘Teenage Bitcoin Millionaire,’ trust us on this one! They’re the exception, not the rule.

Mistake #2: Investing on impulse

Many investors jump into trading based on hype—kinda like Bitcoin, which surged to record highs in December before losing billions of dollars since, sometimes in 24-hour periods.

In other words, decision to enter the stock market’s based on an impulse. There’s no proper entry strategy and no exit strategy.

This is not how an investment decision should be made. Every investor should realize that investing in the stock market is a long-term play—it’s definitely NOT a get-rich-quick scheme.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

-Paul Samuelson

Mistake #3: Following the hot tip! 

Investors are all on the lookout for hot leads and stock market tips. But in reality, there aren’t any. This mistake is exactly how the “Wolf of Wall Street”got people onboard with his schemes.

Even if someone does have a hot tip, you have to watch out for human nature: People may skew positively towards stocks they own—and negatively towards the ones they don’t.

The reality is this: There are qualified analysts who spend all day researching market trends and metrics.

Investment managers and brokers then share these analyses with premium clients. Much more credible info, yes. However even after receiving this analysis, there is no guarantee the investor will see an ROI.

Warren Buffett is a firm believer that investors can grow wealth by just replicating the indices instead of looking for multi-baggers and stocks that are expected to crush the market.

“If stock market experts were so expert, they would be buying stock, not selling advice.”
Norman Ralph Augustine

Mistake #4: “Buy/Sell Strategy”

This is probably the biggest misconception of all. Many investors, impulsively, end up buying a stock just because they see the price surging. (Again, think Bitcoin in December.)

As the price continue to climb, they’ll sell the stock and make a huge profit. The so-called Buy-Hold-Sell Strategy

But that is not how the stock market works. (Buffett’s mantra is buy-hold-and don’t watch too closely.)

If you do buy a stock, hold it for some time and then sell…you don’t have any guarantees the stock will rise.

A better play—aside from Buffett’s, obviously—is the borderline cliched “Buy Low/Sell High” strategy. In this strategy, an investor buys a stock on the downslide instead of when the price is rising.

All the investor has to do is hold the stock until a price correction occurs. If the stock is fundamentally strong, the price will increase. This will be the time to sell it off and earn a profit.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett 

Mistake #5: No clear investment objective

Every investor should define, clearly, what his or her investment goals are.

The rule of thumb of investing is the higher the risk, the higher the return. So if the market return is less, then—needless to say—the risk involved is deemed less.

There are two forms of securities, generally: Stocks (equity) and bonds (debt).

Stocks

Equity stocks tend to have higher risks associated with them. However, there is a tremendous potential to earn capital gains from equity shares—but with the caveat that you should be prepared to lose your investment

Bonds

Bonds and fixed income instruments are relatively less risky than equity shares. They offer periodic returns in the form of interest but are still prone to market risk.

A short-term investor looking for minimal risk is better off buying treasury bills and government securities.

Whether it’s cashing out on tech stocks with high upside or just collecting tax-free yield from municipal bonds, your investments should be in line with your objective.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch

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10 Stock Terms Every Newbie Investor Should Know

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Investing in the financial markets can seem quite tricky. There are far too many stories where people tried to play the stock market without much success. When the markets are on a roll, everyone wants a piece of the pie.

Here are 10 terms every investor cannot afford to miss.

Market Cap

The market capitalization of a stock is simply the total number of outstanding shares multiplied by the share price of the company. Companies are generally differentiated on the basis of market cap.

Small cap companies generally have a market cap of between $300M and $2B, while mid-caps are between $2B and $10B. Any company with a market cap over $10B is considered a large-cap. While small-cap and mid-cap stocks have historically outperformed large caps, they are also way riskier.

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