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Activision Blizzard stock was trading close to its year to date highs yesterday on NASDAQ but is still a long way off its 52 week high. But some investors are starting to wonder whether a rally may be in the offing for the global gaming group.

Activision Blizzard shares jumped from $42.26 in mid August to trade at around the $53 mark this week, prompting some enthusiasm from investors that the stock will rally further, potentially to a 52 week high of close to 80 bucks. To understand whether this is a possibility, it is important also to look at what brought Activision Blizzard stock down in the first place.

Activision Blizzard stock: what we think

Activision Blizzard has been managing expectations in the market, forecasting a decline in revenues and most importantly announcing that the re-launch of its World of Warcraft game, originally scheduled for 2019, will not happen this year. It is hard to underestimate the position World of Warcraft enjoys in the video gaming market and just how much revenue it has contributed to the Activision bottom line.

Activision Blizzard has, however, woken up to the massive potential in mobile gaming, with the successful port of its flagship Call of Duty game to mobile.

The key is mobile gaming

The mobile gaming market is going to be a big factor in the further growth of Activision Blizzard. Mobile gaming revenues smashed through $60 billion in 2018 and look set to reach almost $70 billion this year. Industry forecasts put 2020 revenues at around the $76 billion mark.

There is absolutely no reason to argue with this trend. On a visit to Beijing in August The Armchair Trader was able to observe the prevalence on mobile gaming in Chinese society. Video games companies that can successfully tap into the Chinese gaming market will make money, period. Activision Blizzard IS seriously looking at its China strategy, which could well play enormous dividends.

Gaming industry consultancy New Zoo is predicting 9% annual growth in the gaming market.

The key to future price growth for Activision Blizzard is going to be its ability to tap into the revenue growth represented by mobile gaming. Part of the reason it was sold off so heavily in 2018-19 was that management did not have a coherent enough mobile strategy in place that could please analysts. This caused investors to go shopping elsewhere in the space and Activision Blizzard stock went off the boil. Now it seems as if it is back on again.

Is Activision Blizzard still a value play?

The stock had been a value play in July/August but analysts reckon that at 22x earnings it is now getting back into more realistic territory. But there is still the growth story to consider. The big rally has really been all about Call of Duty mobile. The company will need to look at porting new titles onto mobile platforms, or better yet, coming up with further original games.

China is going to be a critical market for Activision Blizzard, which is why it was so sensitive about a gamer who chanted a pro Hong Kong independence slogan following a post-game interview on a Taiwanese gaming channel, and banned him. It also stripped him of his earnings.

Chinese technology giant Tencent is a shareholder in Activision Blizzard, which could help to open doors in China. But this looks like it may have to wait until the current US-China trade talks are resolved.

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Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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