To no one’s surprise, video game publisher Activision (NASDAQ:ATVI) has been red hot amid the novel coronavirus pandemic. Year-to-date, Activision Blizzard stock is up nearly 25%, as locked up consumers under stay-at-home orders have spent more time and money on video games over the past few months than ever before.
I’ve been bullish on Activision Blizzard stock the whole way up.
At the beginning of the year, I called the stock one of the top 15 stocks to buy in 2020. More recently, after Covid-19 hit, I laid out three big reasons why Activision Blizzard’s stock would cruise to and above the $70 mark.
But now I’m singing a different tune: Activision Blizzard is no longer a strong buy.
That’s not to say this stock won’t go higher. It likely will, because coronavirus-related tailwinds will propel the company to report strong numbers for the rest of the year.
But, it is to say that the best of the stock’s rally has already come and gone. The valuation is simply maxed out, and there aren’t significant upside drivers on the horizon that will warrant a jump in shares to substantially overvalued levels.
All in all, I say stick with Activision stock, but don’t chase the rally. Also, don’t be afraid to do some profit taking here. This stock has already had its day in the sun. There are probably better investment opportunities out there for the rest of the year.
Not Done Yet
Up 25% on the year and at its highest levels since late 2018, Activision Blizzard stock can and should go even higher into the end of the year.
The story here is just too good.
Everyone is stuck at home. Video games are one of the two best forms of at-home entertainment, with the other being streaming services. Sure, this virus won’t last forever. But consumer hysteria regarding Covid-19 will stick around for at least the next few months, if not all the way into the end of the year.
So long as that hysteria sticks around, Activision will continue to report strong numbers. Just look at what Covid-19 is expected to do to Activision’s second-quarter numbers. Management recently guided for Q2 revenues to be up more than 20% year-over-year — the company’s best revenue growth rate in years.
Q3 numbers will be strong, too. So will Q4 numbers. Especially since in the back-half of 2020, Activision will launch a new Call of Duty game amid pandemic hysteria.
It’s tough to see the company’s stock failing against that strong fundamental backdrop. As such, I do believe shares can and will finish the year higher than where they sit today.
But The Best Has Already Happened
Although Activision Blizzard’s stock will end 2020 above $75, it won’t end the year that much further above $75.
There’s one simple reason why: valuation.
The company’s stock trades at almost 30-times forward earnings, matching its highest valuation over the past 10 years. The last time Activision Blizzard’s stock traded this high? Back in late 2018. Right before the stock got cut in half.
I’m not saying that’s going to happen again. The fundamentals today are strong, and warrant a premium valuation.
But I am saying that all of those good 2020 earnings reports, all of those strong Covid-19 tailwinds, all of the record revenue growth numbers … it’s all priced in today.
What isn’t priced in is a hiccup. And hiccups happen. Maybe the virus fades more quickly than expected, and consumers go back outside. Maybe economic re-opening normalizes consumer behavior more quickly than expected, and consumers stop playing video games all the time. Maybe the new Call of Duty game misses the mark, and Activision’s second-half numbers don’t live up to supercharged expectations.
If any of that happens, the stock will crumble from today’s levels. If any of it doesn’t happen, shares will maybe grind higher towards $80.
In other words, the risk-reward profile on Activision stock is no longer that attractive. That’s why I caution against chasing this rally.
The Bottom Line on Activision Blizzard Stock
Long term, I love Activision stock. But here and now, with shares up 25% in a few months and the stock trading at its richest valuation in a decade, I’m not in love with it. All the good news from consumers playing more video games amid Covid-19 is fully priced in.
That doesn’t mean the stock can’t go higher from here. It probably. It just means the best time to buy the stock has come and gone.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.