Money Week - UK (2021-10-08)

moneyweek.com 8October 2021 MONEYWEEK

I

t’sbeenaroughsixmonths
forthevideogamessector,
andindustryheavyweight
ActivisionBlizzard(Nasdaq:
ATVI)hashadanespecially
gruellingtime.Butthat
makesitwellworthalook.
Videogamestockswereall
theragewhenCovid- 19
lockdownswereattheirpeak.
ButActivision’sstock,after
deliveringannualisedtotal
returnsof 21 .4%fortenyears,
hasslidby 21 %sinceApril.
Sentimenthasdeteriorated
forseveralreasons.While
investorscheeredthe
videogamessectorwhen
everyonewasstuckat
home,they’vejumpedship
asvaccinationshavebeen
rolledoutandlifehasstarted
returningtonormal.Inthe
meantime,therehavebeen
concernsoverChinarestricting
game-playingforitschildrento
threehours aweek. Analysts
alsohighlightthethreat of
futurecompetitionfrom
establishedentertainment
giants,suchasNetflix,starting
to streamgamesonlineto
existingsubscribers.

Alingering legalproblem
ButActivision’sshare price
hasfallenfurtherthanits
peers’,owingto aCalifornia
statelawsuit in late July
allegingwide-ranginggender
discriminationandserious

sexualharassmentinthe

workplace.Thefalloutwas

compoundedbyastaffwalkout

inprotestagainstaninitial

responsefromthecompany,

subsequentlydescribedas

“tonedeaf”byitsownCEO,

BobbyKotick, accordingto

TheWallStreet Journal. These

areseriousallegationsthat the

companyistacklingwitha

revamp ofinternal processes

andpersonnel changesatthe

topin ordertobringabout

pervasivechangeinthe

company’sculture.

Weknow,too,that

lockdownsweren’tgoingto last

forever;itisnosurprisethat

at somepointpeoplewould

leavetheirhomes andnot play

videogamesquite somuch.In

thesameway,however,that

investorsoverreact to good

news,theyoverreact to bad

newstoo.They’vewipedout

over half theshare-price gains

fromtheearliestCovid-19

lockdownsandslashedthe

valuationbyathirdonsome

measures.Thenoisefromthe

newscanbedistracting,but

lookat thecompanyitself and

you’ll findit’shardlythedud

themarketsuggests. In fact,it’s

nowabargain.

Thecompanycertainly

hasagreat deal of work

to doto restoreits image,

butquarterlyresults in

August showedthat itis in

fundamentallygoodshape. In

thethree monthsto30June, it

eclipsedanalysts’ expectations

onsales, rakingin $1.9bn,and

profits, whichreached$0.91a

share. It alsoraisedits earnings

expectationsforthewhole

Activisi on Blizzard is a

leadi ng videogames

business valuedat

$60bn. Itsshares have

risenbyanannual20%

for17years.The group

is oneoft he world’s

biggestgames firms.

It wasformedin2008

throughamerger

betweenActivision, a

large developerof

games played on

consoles, andBlizzard,

anotherpubl isher

focused on computers.

In 2015 the

King vide ogame

business,which

concentr ates on mobile

phones,was added.

Activisi on Blizzard’s

games areoften

billion-dollar franchises

andhavebecome

household names.

Best-sellersinclude

Activisi on’s war-based

Call of Duty;Blizzard’s

fantas yrole-playing

gamesWorl dof

WarcraftandDiablo,

plus itsshooter

adventureOverwatch;

andKing’smobile

puzzle gameCandy

CrushSaga.

Meanwhile, the

tradi ng outlookremains

buoyant.Although the

lockdown-induced peak

in playershas passed,

the pandemic has

attractednew audiences

expectedtostay.

Videogamingisonthe

rise worldwide, with

growth driverssuchas

increasingmobile-

phonecapab ilities,for

example,drawing

audiencestomore

sophistic ated offerings.

E-sports,inwhich

Activisi on Blizzard has

been aleading light, is

also helpingattract

more players.

Tighter playing

restrictions, such as the

clampdown on gaming

in China, is abeari sh

factor forthe sector.

Activisi on is largely

unaffe cted by Beijing’s

move –its Chinasales

comprise just5% of the

total. On apositivenote,

recent courtrulings

suggestgames

publ isher scan avoid

payinglargefeestot he

like sofAppleand

Google forsales made

throughtheir app

stores,which is abig

cost-saving. Analysts

have been growing

increasinglyupbeat

aboutthe groupand the

consensus12-month

pric etargetis$ 113, a

near50% premium to

the currentlevel.

Activision Blizzard has been in the news for the wrong reasons lately.But it hasabright future

A cheap play on videogames

©G

etty

Imag

es

Aheavyweight with bigpotential

year to $3. 76 ashare,aheadof

marketforecasts.

Operatingmarginsare

climbingas arisein online

salesisgraduallylowering

overall costs;at 36%theyare

well aboveindustryaverages.

Thebalance sheet is solidwith

netassetsandcashat record

levels:$16.3bnand$9.2bn

respectively.Therewas little

suggestionthat thelegal issue

will significantlyaffect

salesorthenumber of game

playersdirectly.

Lookingahead,28ofthe

36 bankanalysts covering

thecompanyrate it either as

“outperform”or“buy”. The

consensusis thegrowthtrend

over recent yearswon’t be

interrupted. Onthecontrary,

annual salesandprofits

growth should averagearound

10%and17%respectively

until 2023.

Activisionis adominant,

well-financedleaderina

global,high-growthsector

withstrongbrandsandloyal

customers. It is nowvaluedfor

alot less thanit hasbeenfor

years. If investorscan

stomachvolatility causedby

short-termdifficulties and

focusonthelonger-term

prospects,there’severy chance

they’llbewell-rewarded.

StephenConnollywriteson

marketsand finance, and

hasworkedini nvestment

banking andasset management

fornearly30years

([email protected])

Comp anies 29

2017 2018 2019 2020 2021

Share price in US dollars

120

100

80

60

40

20

Activisio nBlizzard(Nasda q:ATVI)

CEOBobbyKotickisoverseeingarevampofinternalprocesses

tocombatrecentallegationsofdiscriminationandharassment

StephenConnolly

Investmentcolumnist