Activision Shares Severely Discounted Compared To Strong Growth Potential, Analyst Says

MKM Partners analyst Eric Handler upgraded Activision Blizzard, Inc ATVI from Neutral to Buy with a $95 price target.

Activision's shares severely discounted the fundamental improvements seen with its business and the strong growth potential in 2023, Handler wrote. 

He remained optimistic over the approval of the Microsoft Corp MSFT deal and was pleased with better-than-projected 3Q bookings and EPS versus his estimates and the consensus. 

ATVI's outperformance was paced by an upside in bookings for all three operating segments, a better-than-anticipated gross margin, and lower-than-forecast operating expenses. 

ATVI's return to positive bookings growth for the first time in a year (+10%), paced by Diablo: Immortal, which launched in most global markets in early June and then in China in July. 

King bookings were up 6% (its 10th consecutive growth quarter), easily outpacing the industry, demonstrating the resilience of Candy Crush in a challenging mobile environment.

Paced by solid releases like COD: Modern Warfare II, COD: Warzone 2.0, Overwatch 2, and WoW: Dragonflight, Activision is on track to return to the top and bottom line growth for the first time in a year. 

The quarter is off to a better-than-anticipated start, with COD: Modern Warfare II surpassing $1 billion in sell-through in record time. 

All the 4Q releases should provide a solid boost to results, but more importantly, with a consistent pattern of planned live services drops, engagement should persist well into 2023 and beyond.

Benefiting from meaningful carryover from 2022 game releases plus multiple new title launches, 2023 should mark a return to full-year growth. 

This year will be the long-awaited release of Diablo IV. In addition, Handler looks for sizable live services growth for COD: Modern Warfare 2, a full year's contribution from COD: Warzone 2.0, and the planned debut of Warzone Mobile at some point in the year, in addition to a new COD premium title late in the year. 

ATVI will see a full year's contribution for Diablo: Immortal and Overwatch 2. 

Having a seasonal cadence of 8-9 weeks for Overwatch 2 could provide a benefit relative to Fortnite and Apex Legends, which have long seasons of 10-12 weeks and 12 weeks, respectively. 

There is also the potential for a new mobile IP, Warcraft: Arclight Rumble, to progress to a full launch from its current regional testing phase.

Price Action: ATVI shares closed at $73.88 on Tuesday.