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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.

Money

Will Cloud Gaming Drive The Next Big Gaming Transition?

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The global gaming industry has always been a disruptive one. Nuclear physicist Edward Condon developed the first computer game in 1941 called Nim, one which pretty much saw the computer win 90% of the time.

The disruption didn’t fizzle out. Soon afterwards, the first programming guidelines were written for a chess game developed by Claude Shannon, while a decade later the US Department of Defense created a war game — STAGE.

This really set the stage for what was to come later video games. American investor Ralph Baer wasted no time and conceived the idea of playing video games on TV, and the world’s first gaming console was released. The rapid evolution of gaming consoles coupled with gaming design and the introduction of graphics cards have taken the global gaming industry by storm.

In the last decade, the evolution of smartphones opened up a totally new segment known as digital gaming. In 2016,  Activision Blizzard paid close to $6B to acquire King Digital- a digital gaming behemoth. Not one to trail far behind, the eSports segment, despite its nascency, proved to be a long-term revenue driver for top gaming firms.

Will cloud gaming be the next key driver in global games?

Now companies such as Microsoft [MSFT], Google [GOOG] and Electronic Arts [EA] aim to create a market for cloud gaming. So what exactly is cloud gaming? It’s similar to online streaming services such as Netflix [NFLX] and Amazon Prime [AMZN], but with games.

Cloud gaming will allow users to play games on their computer or mobile devices. A remote server will send players video feed and receive controller inputs. This now means that players no longer need to purchase gaming consoled to play the latest games. All you need is a stable internet connection.

Google’s cloud gaming project is called Project Stream and the company launched a beta test last month. Players required a Google Chrome browser and an internet connection of 25 Mbps or higher.

Microsoft which also manufactures the Xbox consoles announced its cloud gaming platform known as Project xCloud. It has confirmed several Xbox games for beta testing such as Halo, Minecraft, and Gears of War.

The tech giant is hoping for growing interest in cloud gaming to offset any declining sales in gaming consoles.

Following Google and Microsoft, top gaming publisher Electronic Arts has forayed into this space, with a project known as Project Atlas.

Will this move garner global attention?

The shift to cloud gaming is going to be as disruptive as any in the gaming space. Players can now subscribe and stream games online instead of spending over $300 for the latest gaming console. The cloud gaming space is expected to grow at a compound annual growth rate of 26% between 2017 and 2023.

While Netflix and Amazon have changed the consumption of entertainment via cord cutting, it is very likely that cloud gaming will soon be a hit among players in a few years time. Is this the end of the gaming console?

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Money

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.

1. 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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Being A Millionaire: What Does It Actually Mean?

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You’re dreaming about luxury vacations and nice cars. OH, you can’t wait to be a millionaire.

But I’m here to tell you to think again.

While having more money is never a bad thing, what you’ve probably envisioned and what the reality is don’t match up. Let me explain.

What is the Definition of a Millionaire?

By definition, a millionaire is a person or family who has a net worth in excess of $1 million dollars. This answer is very U.S. centric as different countries have their own versions of this answer. For example, it takes 117 Japanese Yen to make 1 USD, so $1 million Yen doesn’t get you very far!

Even though in the U.S. the concept of a millionaire is static, what those million dollars gets you over time can change dramatically.

Inflation

An example of that is the effect of inflation. A million dollars in 1950 is worth about $10.5 million in today’s dollars. But, the definition of a “millionaire” didn’t change. So, Today’s millionaires have 1/10 the amount of money that millionaires had when your parents were born.

So, the idea of “millionaire” status is really less meaningful than it was decades ago.

Just the rate of inflation will create more “millionaires” every year.

Exchange Rates

Another thing that messes with the definition of a millionaire is the fluctuation of exchange rates and purchasing power.

Let’s go back to the example above with Japan. We know that 1 US Dollar can get 117 Japanese Yen. We know that $1 can get you a chicken sandwich at a fast food restaurant. If you can go to Japan and get a similar sandwich for ¥ 117 then your purchasing power hasn’t changed.

The reason why I bring this up is to show that having a million dollars may be worth a lot in one place in the world but not worth much elsewhere depending on purchasing power.

How Many Millionaires in the U.S.?

in 2017, there were roughly 11 million US households with a net worth over $1 million or around 15 million individuals.

There are roughly 325 million people in the U.S. which means that around 4.6% of the US population are millionaires. In other words, around 1 in 20 people are millionaires.

Doesn’t sound like it’s rare, does it?

When you go to the mall, a huge number of cars in that parking lot are owned by millionaires.

In your child’s classroom, chances are one of those children were born to a millionaire family.

Chances are, one of your friends or family members is a millionaire and you don’t even know it.

But, if so many people are millionaires, where are all the Lambos and mansions?

It’s Not What You Think

Net Worth is not cash in the bank. You can’t spend $1m when it’s coming from the value of your home or 401k. Even if it was cash in the bank, it’s not even a lot of money.

$1m doesn’t get very far. You can buy a decent house with it but that comes with expensive maintenance, lawn care, repairs, and a crap ton of new furniture to fill up 5x more space than you’re used to having.

It can get a foreign sports car, but that comes along with $500 oil changes and $1,000 for a new tire (remember, you need 4).

$1,000,000 invested conservatively could earn you around $40,000-$50,000 per year in interested. That’s hardly enough to retire on especially as old age comes with added costs of health care.

But, if most of that $1m is in your home, which is true for most people, it’s not earning any interested. Even if it was, you’d have to sell your home to get that money. Then what?

Don’t Focus on Becoming a Millionaire

Of course, anyone would rather have $1m than not have it. But, don’t make it your focus. Having it isn’t going to get your cars or vacations. Net worth is one thing to measure, but it’s more important to focus on cash flow.

Yearly passive income will buy you anything you want. It’s money you can spend. It’s cash in the bank. Net worth is money locked up somewhere. You need assets, but assets don’t buy you things. If that asset doesn’t produce cash flow, you can only use it by selling it and that’s not a good place to be.

What’s more important is focusing on building up passive sources of income from real estate, side businesses, stocks, or other ventures.

Focus on building up $40k or $100k in passive income rather than focusing on having $1m in net worth.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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