The long-term view by Sterne Agee on this company is considered favorable, based on: a strengthening portfolio, a best-in-class management team, opportunity in China, strong free cash flows and tailwinds of the console cycle.
However favorable the long-term view might be, Arvind Bhatia, the Sterne Agee analyst behind this report, gave some conservative near-term guidance:
The other near-term issue is 2015 guidance. While we don’t expect formal guidance until early next year, we see potential for the company to discuss guidance in directional terms on its 3Q call in November. Given the tough comps next year (due to Destiny) and management’s normal conservatism in guidance, we see potential for guidance to reflect flat to down top line y/y but increase in EPS y/y due to a more favorable (higher margin) revenue mix next year driven by DLC for Destiny, catalog sales of Destiny, growth in Hearthstone, launch of Heroes of the Storm and Call of Duty online in China. In addition, we see higher possibility of buybacks next year — especially early next year when the remaining Vivendi stake unlocks — given the cash ATVI will be generating from Destiny, Call of Duty, etc.
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Activision is building a stronger portfolio with its Call of Duty franchise, among other releases down the road. Heroes of the Storm, expected to open for beta testing in the coming Blizzcon, will compete directly with League of Legends, which generates around $500 million in revenue annually. The new Call of Duty: Advanced Warfare will be available in China, among other staples in Activision’s portfolio, ultimately presenting an entire new market to pump for revenue.
Sterne Agee issued a Buy rating for Activision with a price target of $25.00. Sterne Agee also states that it has the potential to reach more than $1.75 in earnings per share in the next two to three years.
Activision has a consensus price target of $26.19 and a 52-week trading range of $16.06 to $24.18. Its market cap is about $15 billion.
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