How One Key Analyst Sees Activision Blizzard Rising After Earnings

Argus maintained a Buy rating for Activision Blizzard and raised its price target to $34 from $30, implying an upside of 16.1% from current prices. In the firm’s view, Activision Blizzard deserves to trade at a premium to peers based on its industry leadership, though the stock currently trades at a discount.

While this company rode the wave of a strong game-release cycle last year, 2015 promises to be a lighter year for new releases. Additionally, Activision Blizzard is launching two new “free-to-play” titles in 2015, which will take time to generate revenue. Argus noted that the company is also shifting its business strategy, first, by extending game life and spurring engagement through periodic releases of additional downloadable content, and, second, by increasing digital revenue.

The company is fighting the secular decline in packaged games with increased online functionality. It is developing expanded, high-margin versions of its franchise games, developing “free-to-play” games for that growing market segment, and introducing new game concepts.

Activision Blizzard’s lighter release schedule in 2015 lacks a new offering comparable to the March 2014 release of “Diablo III: Reaper of Souls.” Activision launched a new title in the “Warcraft” franchise, “Hearthstone: Blackrock Mountain,” in April, and a free-to-play game, “Hearthstone: Heroes of the Storm,” in June. Looking ahead to 2016, Activision plans to release a new title, “Overwatch,” now in closed beta, and a reboot of the “Guitar Hero” franchise, “Guitar Hero Live,” in the fall.

As a result the Argus raised its 2015 EPS estimate to $1.34 from $1.22 and its 2016 forecast to $1.49 from $1.43. The 2015 estimate is above management’s upwardly revised guidance of $1.30. The company has beaten its own guidance in each of the last 16 quarters, and topped consensus in 14 of the last 16 quarters. Management now expects negative foreign exchange movements to shave $0.19 from 2015 EPS; it previously expected a $0.15 impact. Over the next five years, the firm expects earnings to increase an average of 15% annually.

Shares of Activision Blizzard were relatively flat at $29.29 on Tuesday afternoon. The stock has a consensus analyst price target of $31.71 and a 52-week trading range of $17.73 to $29.70. The shares are up 44% on a total-return basis year-to-date, compared to a 3% increase for the Russell 1000.