BACKGROUND
ATVI is a leading global developer and publisher of interactive software products and entertainment content. It operates on several platforms such as: console, PC, and mobile device through its three main subsidiaries Activision Publishing, Blizzard Entertainment, and King Digital Entertainment. The largest source of the company's revenues come from its operations involving console games.
ATVI competes for the leisure time and discretionary spending of consumers with other interactive entertainment companies like EA Games (EA) as well as providers of other forms of entertainment such as films, TV, social networking, etc. ATVI acknowledges the intense competition it faces in this industry. They also list the main competitive factors that exist in the industry and it is my belief that they have many of them working for them such as: game quality, brand name recognition, functionality, and access to distribution channels.
Companies in this industry including ATVI are heavily reliant on the distribution and functionality provided by third parties. ATVI due to its large size may have an easier time transitioning if these third parties can no longer be relied upon.
COST OF CAPITAL
WACC= 10.18%
DISCOUNTED CASH FLOW
As of close on September 3, 2019 ATVI shares traded at $51.07/share. Using the DCF valuation method I estimate the price objective of ATVI to be 44.90/share. With this in mind, I recommend selling shares at this inflated price level before it falls.
SENSITIVITY ANALYSIS
The above DCF method price objective was found using an annual revenue growth figure of 7.88% accounted for weights of each of the three main business sectors as well as the average growth rate of Subscriptions and Licensing.
Recently the media has blamed the video game industry for exposing our youths to violence at a young age and that this may cause them to be desensitized. This could lead to a slower revenue growth over the next five years. With a low growth rate of 2% I estimate a per share value of $43.00.
As technology continues to advance, the content produced by ATVI also gets more realistic which could draw in more customers. To account for this possible acceleration of revenues I ran the same valuation process with a growth number of 15% and still got a per share value less than ATVI’s current trading price. This suggests that now is a good time to get out of ATVI.
2% | $32,983,626,050 | $43.00/share
7.88% | $34,443,200,050 | $44.90
15% | $36,435,013,720 | $47.50