Activision Blizzard (ATVI) is trading at low valuations despite strong earnings power and free cash flow, a consequence of low investor interest in the gaming space, says Neil Doshi, Senior Equity Analyst at Citi Investment Research. Doshi says investors are concerned that players, in general, won’t buy consoles if the budget has already been spent on mobile devices and uncertainty regarding new console specs.
“Valuations have come down pretty dramatically for a lot of these companies, especially a company like Activision, which is now trading around 10 times next year’s earnings. If we remove the cash that they have on their balance sheet, the stock is trading around seven to eight times for a company that’s probably growing earnings in the double-digit range,” Doshi said.
Doshi says ATVI has best-in-class management, proven innovation capabilities with high margins, strong online gaming communities and they have major-scale participating in China. ATVI also has 30% operating margins, three times as much as some of its peers, and a strong focus on shareholder return.
“Last year, Call of Duty and World of Warcraft accounted for about 80% of ATVI’s operating profits. This year, they’re going to have about four key titles that include World of Warcraft, Call of Duty, Diablo III and Skylanders Giants. And next year, we’re going to see even more diversification, which will include those first four games, and Call of Duty China, a new game from the Bungee developers and StarCraft expansion as well,” Doshi said.
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