Why Activision Is the Gaming Stock to Buy

Gaming stocks have been on a strong run over the last few months and Activision (ATVI) has been my favorite pick from the sector. The stock has been a great performer since 2015 and I expect it’s bullish run to continue for several reasons mentioned below.

Why King matters

Activision’s first quarter results showed that the company took a step in the direction of digital games, as the revenue generated from digital segment accounted for 64 percent of the company’s overall revenue, a surge of 13.9 percent y-o-y.

The increment in digitization of its sales helped the company enhance its margins to an imposing 19.1 percent in the last one year.
The impressive digitization of sales accounts for the primary reason why the company was able to share such striking figures in a very harsh first quarter for many companies in the S&P 500.

In the most recent quarter, the company proclaimed that it observed 544 million monthly active users for its King, Activision, and Blizzard. As a matter of fact, surging user base and engagement is also a prospect for the company to grow its revenue generated from in-game advertising.

There is no doubt regarding the fact that the mobile gaming division is projected to be one of the swiftly growing segments in the imminent years. Eventually, Activision will gain huge benefits mainly because King’s acquisition, against all odds, has turned the company to a market leader in the mobile gaming segment. Moreover, it has also increased the company's monthly active users.

With the acquisition of King, the company has gained access to 463 million users.  As per App Annie, three of the top 15 games on U.S. app stores for the prior nine quarters were developed by King. As a result, with access to prevalent mobile franchises like Pet Rescue and Candy Crush, the company is anticipating to gain the benefit of a massive revenue prospect with in-game advertising.

Currently, the company has a stunning free cash flow margin of 75 percent, with operating cash flow 3.1x its net income. However, it is certain that King acquisition will enhance the metrics and it appears like it was acquired at a massive discount.

Conclusion

Activision’s acquisition of King will help the company sustain its upwards trajectory going forward. Although the stock’s valuation is a bit high right now, it can still continue moving higher on the back of strong user growth and improving metrics.
Published on Aug 2, 2016
By Prudent Investor

Copyrighted 2016. Content published with author's permission.

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