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The Higher Rates Go, The Worse Activision Blizzard, Inc. Stock Looks

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Video game publisher Activision Blizzard, Inc. (NASDAQ: ATVI ) has been a very enigmatic stock for me.

On one hand, Activision stock is supported by this robust growth narrative that includes having the headline game in a resurgent video game industry. The company is also rolling out the beginning of eSports which could be a supplement to the NFL and NBA, and immersing more deeply into next-gen gaming fields like augmented and virtual reality.

On the other hand, Activision stock is a richly valued asset that just doesn't have enough growth potential to warrant the current multiple.

What to do?

In a strong bull market, momentum wins out over fundamentals, and sexy growth narratives send stocks higher. But in late-stage bull markets threatened by higher fixed income rates, that isn't the case. Fundamentals start to matter, and valuations become more important than ever. Sexy growth narratives start to lose their appeal.

Right now, with 10-year treasury yields threatening to break out of a more than 30-year downtrend, we are in a late-stage bull market where valuation really matters.

Unfortunately, I think that means Activision stock will struggle into the foreseeable future.

Valuation Will Start to Matter for Activision Stock

The bull thesis on ATVI stock is pretty straightforward.

The video game industry is roaring back into favor. Video game sales soared 59% last month to record their best January in seven years. That follows a year wherein video game sales rose 11%, one of the best performances in recent memory. At the heart of this upward surge is Activision's Call of Duty franchise, which yet again had the best selling game in 2017.

This tailwind should persist. After all, the video game industry is on verge of breakthroughs with augmented and virtual reality gaming. Those breakthroughs will spark multiyear demand catalysts, from which ATVI will be big a beneficiary.

Bigger than all of that, though, are the company's eSports initiatives, headed by Overwatch League, or OWL. OWL is the eSports community's first attempt to legitimize eSports as a league on par with the NBA, NHL, MLB and NFL.

OWL has city-based teams, standings, stats, salaries, jerseys, endorsements - the whole nine yards. It's been a huge success thus far, providing a promising multiyear growth story for ATVI.

But even with all that growth coming from super-charged video game sales and potentially a ton of ad revenue flowing through from eSports, analysts still see Activision as only being a 16% per year earnings growth story. That isn't all that great. Especially considering the stock is trading at 27.5 times 2018 earnings estimates, implying a forward price-to-earnings/growth (PEG) ratio of 1.7.

The market is trading at a much, much cheaper PEG ratio of 1.1 .

Granted, Activision stock has gotten away with a big PEG ratio over the past five years , but that was when rates were falling or near historic lows, meaning momentum beat out value. But now that rates are rising, value is starting to beat out momentum. That is not welcome news for a stock with a PEG ratio more than 50% as large as the market's PEG ratio.

Bottom Line on ATVI Stock

Activision is an exciting company with some promising growth catalysts on the horizon. But those catalysts are pretty much already priced in.

As rates creep higher and bond yields start to challenge equity yields, Activision stock will have a tough time gaining ground. After all, it's a stock with a multiple bigger than its growth prospects.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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The post The Higher Rates Go, The Worse Activision Blizzard, Inc. Stock Looks appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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