Where will Activision Blizzard be in five years?

Activision Blizzard (NASDAQ: ATVI) is one of the best performing stocks of the past two decades. Up more than 7,000% since 2000, the video game conglomerate crushed the S&P 500, which returned around 169% during the same period. With his Triple-A console and PC titles, he has been able to constantly increase his profits due to the sustainability of franchises like Call of Duty and World of Warcraft. But with new gaming paradigms on the horizon like virtual reality (VR), eSports, and the continued rise of mobile gaming, Activision will need to evolve to keep pace.

Here’s what the business could look like in five years.

What will be different

Over the past couple of years, the two big changes in gaming have been the growth of mobile (mostly smartphone games) and free-to-play battle royale concepts like Fortnite. Growth in these categories is expected to continue and Activision is preparing to adapt its business accordingly. In the past, the only way for a player to access Call of Duty was to buy a $ 60 game for their console or PC. Now with Call of Duty Mobile and Warzone (the Fortnite– like the battle royale game) available as a free option, the company has created a three-pillar strategy, allowing players to choose how they want to interact with the franchise. So far both titles have been very successful. Mobile reached 100 million downloads within 20 days of launch, and Warzone had around 75 million players this summer.

Management calls this their ‘franchise-based strategy’ and hopes to apply it to all of their games, not just Call of Duty. If they perform, in five years, titles like Fireplace, Diablo, and Overwatch could have a much larger number of users than today.

On the eSports front, Activision Blizzard strives to create professional leagues for each of its franchises as another pillar to increase engagement with its users. These are very similar to professional sports leagues, with teams, owners, and players, but instead of playing a sport, teams compete against each other by playing each other in video games. For example, the Call of Duty the league has 12 teams that compete for $ 6 million in prizes each year. The company earns money through sponsorships, ticket sales and broadcast rights. It’s a tiny fraction of the business right now, but by 2025 eSports is expected to grow into a $ 2.7 billion industry. Activision will likely capture a big chunk of that pie.

Finally, with virtual reality, investors could be worried about a shift from the console platform to immersive glasses like the Oculus, which is owned by Facebook (NASDAQ: FB)and how that might impact Activision’s user base. However, as long as Activision can transition its games to work seamlessly on virtual reality glasses, these new interfaces should actually contribute to the overall business of the company.

What will stay the same

Five years from now, you can be sure to bet that gamers will still want to interact with all of Activision Blizzard’s top franchises. They have consistently stayed at the top of the charts over the past two decades, so you must be wondering why the next five would be any different. Players will still want to play first person shooter games like Call of Duty and immerse yourself in role-playing games like World of warcraft.

You can also be sure that in 2026 Activision Blizzard will still pay a dividend and possibly at a higher rate. Its current dividend yield is only 0.51%, but the payout per share has increased every year since 2010.

But is the stock a buy?

In the twelve months ending September 2020, Activision generated approximately $ 2 billion in operating cash flow, a figure that hasn’t changed much in recent years. With a market cap of $ 73 billion, the stock is now trading at around 36.5 times its trailing cash flow, an expensive multiple for a fairly mature company. However, if management is able to execute its mobile, free-to-play and eSports initiatives, the company can leverage many monetization levers over the next five years. Activision Blizzard doesn’t sound like a garish buy, but there’s no reason to worry about owning stock here, even at a premium valuation.