Although Activision Blizzard Inc. (ATVI, Financial) disappointed shareholders in 2016, the stock is off to a marvelous start this year. The stock is up almost 36% year to date. At present, Activision Blizzard, Electronic Arts Inc. (EA, Financial) and Take-Two Interactive Software Inc. (TTWO, Financial) are the top three players of the U.S. video game industry. Of the three, Activision Blizzard remains my top pick due to its diversified revenue streams.
Activision Blizzard reported strong fourth-quarter results in February as it managed to surpass analysts' estimates for both the bottom line and top line. In 2016, the company’s annual operating cash flow came in at $2.2 billion, a surge of 71% year over year from fiscal 2015 figures.
Moving ahead, the company continues to benefit from the rise in digital sales. The company delivered record digital revenues of $4.9 billion in 2016, a 95% increase from the previous year.
Furthermore, the game publisher currently has a robust base of approximately 450 million players who spent more than 40 billion hours playing its games in the prior year, which is pretty amazing. To preserve its enormous player base, the company plans to launch several products like expansion packs and upgrades within games.
According to the latest report from DFC Intelligence, the worldwide gaming market is projected to grow to $100 billion by 2021, from a valuation of approximately $70 billion in 2015. Surprisingly, the mobile games segment is displaying strong signs of positive growth. In 2016, mobile game software sales were the fastest-growing segment. By 2021, mobile games are projected to account for $48 billion in revenue, almost half of the overall gaming market.
Considering the strong outlook of the mobile games segment, Activision Blizzard looks well positioned to benefit in the year ahead as it has already acquired King Digital Entertainment, a top mobile game developer.
In addition, the company published its first installment of “Destiny” in late 2014, followed by two expansion packs in 2015 and 2016. The game performed amazingly well. As a result, the company will launch “Destiny 2” on Sept. 8 of this year. To follow the sequel's release, Activision Blizzard has already planned to launch the first expansion pack in winter of 2017.
The game publisher also purchased Major League Gaming (MLG) , a leader in creating and streaming premium live gaming events and competitions, for $46 million in January. The company believes the acquisition will help it discover the best opportunities in the competitive gaming arena and create value via the establishment of its own tournaments.
Summing up
Activision Blizzard ended 2016 in the red, but the stock has displayed strong signs of upward momentum this year. Furthermore, the mobile gaming segment is expected to be a key driver of growtth in the worldwide gaming market. Activision appears to be in a great position to gain massive benefits in the imminent years.
On the other hand, it is highly likely the revenue generated from digital and in-game sales will continue surging in the years ahead as the majority of gamers are currently in favor of downloading games online instead of purchasing them from retail stores.
The stock offers a healthy dividend yield of 2.44%, which places it ahead of its competitors. The stock, however, trades at a price-earnings (P/E) ratio of almost 41, signifying it is expensive compared to some of its competitors. As an outcome, investors looking to initiate a position in the stock should wait for a dip as it currently trades around its all-time highs. Existing shareholders should continue to hold the stock as its long-term prospects look prosperous.
Disclosure: No position in the stocks mentioned in this article.
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