As a gaming organization, Activision Blizzard has established itself in the market and is one of the main competitors. Considerably, sales are part of the strengths of the company as noted by Reitmeier (2016). This can be identified from the income statement where the net income for Activision Blizzard over the last five years has increased steadily. In 2016, the net income was $966 million, and in 2019 it was $2,031 million. Such an amount in the gaming industry is outstanding.
Nevertheless, this does not mean Activision Blizzard has to have its ups and downs. In 2018 and 2019, the amount of net income decreased. In 2019, the net income reduced by a large margin of $703 million. Despite these changes, the forecasted net income is expected to increase in the next five years. The sales of Activision Blizzard have been rising for the past five years, and this trend is expected to continue as the number of customers increases.
Due to the presence of technology, people are appreciating its benefits and are continuously welcome its use, including at home. Furthermore, with the increase in population, the market for Activision Blizzard is set to increase, which is why the forecasted sales increase steadily. The increase in sales can also be attributed to the company’s brand.
Notably, Activision Blizzard has established itself in the gaming market by providing games on all the gaming platforms. Furthermore, they provide their customers with modern warfare games, which has increased the company sales over the last few years and is expected to increase the sales if Activision Blizzard continues with the same trend providing modern games.
The forecasted operating profit (EBIT) for the company is increasing steadily over the next five years. The increase in operating income can be attributed to several factors. One of them is research and development. Over the recent past, companies have identified the need for research and development.
Consequently, this has resulted in organizations using a lot of finances to fund the research and development since it results in the development of better products that satisfy the needs of the consumers. Between 2016 and 2018, Activision Blizzard increased its research and development expenses. However, in 2019, the resources allocated to research and development decreased slightly. The amounts are below the fastest growing players in the industry.
Considerably, this is one of the weaknesses of Activision Blizzard. Despite being its weakness, this is an opportunity for the company to grow. Notwithstanding, this is set to change over the next five-year period; this amount is expected to increase because it will result in the production of games that customers need, which will consequently increase the company’s profits.
The forecasted research and development funds will increase steadily with a fair margin. The operating profit is also affected by sales, general, and administrative expenses. The company is expected to grow substantially in the next five years, and with such an expansion, there will be an increase in sales, general, and administrative expenses.
Net working capital is an essential indicator reflecting the company’s short-term liquidity position. In addition, it also demonstrates the ability of a business entity to meet its short-term obligations (CFI Education Inc., 2020). The difference between the values of the current assets and current liabilities represents the net working capital value. In case the value of the current assets exceeds the value of the current liabilities, the net working capital would be positive and vice versa.
The change in the net working capital shows whether the company was able to generate cash inflow or cash outflow over the respective fiscal year. Activision Blizzard, Inc. (ATVI) has been demonstrating a negative net working capital values over the period between 2016 and 2019. Therefore, the value of the current assets and current liabilities has been consistently higher according to the respective model (see Figure 1).
Thus, there was a single cash inflow in 2017, followed by cash outflows in 2018 and 2019. The projections utilize the sales growth rates for the period between 2020 and 2024. Next, the accounts receivable, inventories, and prepaid expenses reflect the share from the total sales revenue value based on the historical data. The projections imply consistent cash inflows over the projected period.
Gaming companies like Activision Blizzard only sells software through websites has little need for working capital. Since there is no physical product to keep in stock, and software usually are cloud based, there is no need to worry about up-front inventory expenses, and once the game is launched online, after cost will be very little to maintain . That’s why Activision Blizzard always get by with negative net working capital since they have very low upkeep costs and no inventory costs.
The most recent earnings call of ATVI is telling a different story, which has indicated a strong balance sheet position, as well as the rising sales revenue that was exceeding the earlier projections (The Motley Fool, 2020). Thus, the rising net working capital and respective cash outflows would be consistent with the financial results reported by the corporation.
Capex refers to the capital expenditure incurred by an organization and is located in the cash flow statement. Its increase results in the growth of the company’s valuation. Activision Blizzard has been experiencing an increase and decrease of capital expenditure. Between 2016 and 2017, capital expenditure increased steadily from $136 million to $155 million. Nevertheless, this changed in 2018 when the capital expenditure decreased to $131 million and later to $116 million in 2019. The decrease in capital expenditure explains the decline in the company’s net income over the same period.
Furthermore, it shows a reduction in Capex during the same period. For instance, in 2018, CAPEX was 1.7%, which was a decline from 2.2% in 2017. In the next five years, the capital expenditure of Activision Blizzard is expected to increase steadily without any decline expected. The company is expected to make several investments to increase its customer base, which is an opportunity for the company. Department (n.d.) notes that Activision Blizzard has an opportunity to increase its investments and attract more customers.
With an increased customer base, Activision Blizzard is expected to have more profits, which will also increase the valuation of the firm. In 2020, capital expenditure is expected to be $141.5 million down from $116 million. By 2024, capital expenditure is expected to be $207.1 million.
The reason for this steady increase is because the company has to divide the capital expenditure into two. One section is expected to attract new customers, and thus, result in the growth of the company. The other part of the capital expenditure is expected to meet the operational costs of the firm, such as upgrading software. The CAPEX of the company will remain constant at 2.0% for the next five years.
When compared to the last two years, the CAPEX be higher. A 2.0% CAPEX will help in the maintenance and growth of the company during the next five years. Overall, it shows that Activision Blizzard has a good return on capital expenditure, it is successful at launching of new projects and generated relatively good returns by building new revenue streams.
The competitive environment is competitive, but Activision Blizzard has positioned itself appropriately in its market of operation. This competitive environment is a threat for the company (Reitmeier, 2016). With a market cap of $49,899 million, the company is not only competitive but dominant. Notably, this is a large market cap, which means that Activision Blizzard is trusted by its customers due to the provision of better goods and services. However, the company should keep updating and launching new products to enhance its competition and attain competitive advantage.
The current share price of Activision Blizzard is undervalued. Here are several ways to identify whether a share price is undervalued or overvalued. One such way is using a discounted cash flow analysis. The discounted cashflow utilizes the forecasted future cashflows of a company and discounts them to the present by integrating a reasonable risk factor. Based on the analysis, the discounted share price value is $110.9, whereas the current share price is $64.7.
The current stock is a buy stock. Notably, the stock price is lower than the fair value. It is expected that at some point, the value of the stock will increase and reach its fair value. When a stock is undervalued, it means its price is lower than its real or actual expected price. Buying this undervalued stock at the current price could promise some future profits when the price increases and aligns with its fair value.
Department, S. M. (n.d.). Activision Blizzard SWOT Analysis Matrix (Strengths, Weakness, Opportunities, Threats). Retrieved from http://fernfortuniversity.com/term-papers/swot/1433/532-activision-blizzard.php
Mueller, J. (2010, June 15). Activision Blizzard: Strengths, Weaknesses, Opportunities, Threats. Retrieved from https://www.fool.com/investing/general/2010/06/15/activision-blizzard-strengths-weaknesses-opportuni.aspx
Reitmeier, P. (2016). Activision Blizzard, Inc. in China: a PEST analysis (Doctoral dissertation, Munich Business School).
CFI Education Inc. (2020). Net Working Capital. Retrieved May 3, 2020, from CFI: https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-net-working-capital/
Securities and Exchange Commission. (2019, February 20). Activision Blizzard, Inc. CIK#: 0000718877. Retrieved May 3, 2020, from EDGAR: https://www.sec.gov/cgi-bin/viewer?action=view&cik=718877&accession_number=0000718877-20-000003&xbrl_type=v#
The Motley Fool. (2020, February 7). Activision Blizzard Inc (ATVI) Q4 2019 Earnings Call Transcript. Retrieved May 3, 2020, from TMF: https://www.fool.com/earnings/call-transcripts/2020/02/07/activision-blizzard-inc-atvi-q4-2019-earnings-call.aspx
Department, S. (n.d.). Activision Blizzard SWOT Analysis Matrix (Strengths, Weakness, Opportunities, Threats). Retrieved May 04, 2020, from http://fernfortuniversity.com/term-papers/swot/1433/532-activision-blizzard.php