Activision Blizzard (NASDAQ: ATVI), the parent company of King Digital, Activision and Blizzard Entertainment, announced its first quarter results last week and shattered expectations. Since the introduction of a free-to-play mode for its famous franchise Call of Duty in March 2020, the company recorded a record commitment.
But despite the strong performance and good financial results, the stock is still down from its highs due to a recent sell-off in the tech sector as a whole. With this short-term price movement in mind, investors should ask themselves if this is the right time to buy.
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Feedback on Q1
In order to determine whether or not this is a good buying opportunity, it is important to understand how the business operates operationally.
In the first quarter, Activision Blizzard increased its overall revenue by 27% year-over-year to $ 2.3 billion, thanks to strong momentum in its Call of Duty franchise. Operating profit followed suit, increasing by 30% compared to the same period of the previous year.
Thanks to the introduction of new game modes, Call of Duty had more than 150 million monthly active users this quarter, triple the number from two years ago. The franchise also delivered an operating margin of 50% for the quarter, representing more than half of the company’s overall operating income.
Complete Call of DutyThe success of King and Blizzard have also reported a positive increase in their income. Driven by hit titles like World of warcraft and candy Crush, both companies saw strong user engagement and helped Activision Blizzard achieve a record first quarter operating profit.
What awaits you?
Despite the strong success of Activision Call of Duty the stock is currently the driving force, there are a lot of other factors that should be excited by shareholders as well. As Activision Blizzard is home to many long-standing and value-rich franchises, the company’s recent rebirth Call of Duty wrote the screenplay for his other franchises.
Gaming on new systems has seen significant growth in recent years, with mobile now emerging as the world’s largest gaming market. In response to this trend, Activision Blizzard has focused on leveraging its existing franchises for these new ways of playing. For example, Activision introduced Call of Duty: Mobile in 2019 and just passed 500 million downloads in total this quarter. This multi-system strategy opens up Activision to a much larger user base and helps promote awareness of its older single-system franchises.
CEO Bobby Kotick clarified the company’s strategy when he said on the last conference call that “Call of Duty is the model we apply to our proven franchises.” Now that the plan to leverage the company’s valuable assets has been created, Activision is currently working to apply it to the popular Blizzard title, Diablo.
Diablo 2 is slated to launch later this year for PCs and consoles to re-energize its longtime fan base. Following this launch, Blizzard plans to release its mobile title, Immortal Diablo, A little after. And all of this precedes the long-awaited launch of Diablo 4, for which Activision has not yet set a release date.
Too cheap of a valuation
However, even with the company’s impressive results and the clear roadmap for future growth, Activision shares appear to be trading at a slightly lower price. Over the past 12 months, Activision Blizzard has generated approximately $ 2.9 billion in free cash flow (the amount of cash a business generates) but is trading at an enterprise value (market cap minus net cash) of about $ 66 billion – an enterprise value of free cash flow multiple of 23 times. For reference, Activision’s peer game publisher Electronic arts (NASDAQ: EA) is trading at around 20 times its free cash flow, but is increasing its income at a fraction of the rate.
If Activision Blizzard is able to successfully execute the strategy defined by management, this should present an attractive buying opportunity for long-term investors.
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Ryan henderson owns shares of Activision Blizzard and Electronic Arts. The Motley Fool owns shares and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.