Technology

Why Key Analyst Sees Activision Blizzard Rising 20%

Activision Blizzard Inc. (NASDAQ: ATVI) has been riding high in 2015, with shares up nearly 70% year to date. This video game designer has made a few powerful releases over the course of the year, along with solid earnings to keep it ahead of the pack. In one of its most recent moves, Activision moved to acquire another smaller video game company, and analysts jumped at the thought.

Argus maintained a Buy rating for Activision and raised its price target to $41 from $34, implying upside of 18% from current prices. Most of this call is based around the company’s move on November 2, when Activision announced that it would acquire King Digital Entertainment PLC (NYSE: KING) for $5.9 billion in cash, or $18 per share. That is a 20% premium to King’s October 30 closing price.

Activision expects the acquisition to be accretive in the first year after the closing and to boost fiscal 2016 earnings by 30%. This transaction is still subject to the approval of King shareholders; however, approval appears certain as controlling shareholder Apax, with a 45% stake, and the founding insiders are committed to the deal.

The recently announced King Digital Entertainment acquisition, while it does have some risk, shoots Activision into mobile casual gaming, the fastest-growing part of the video game business. Apart from the Candy Crush franchise, Argus thinks that Activision is buying access to King’s strategic talent. King also should bolster Activision’s presence in the fast-growing Asia Pacific market, which is currently Activision’s weakest geographic segment.

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Aside from King, Activision is focusing on deepening player engagement and broadening its audience for video games. The firm noted that the company also is shifting its business strategy, first, by extending game life and spurring engagement through periodic releases of additional downloadable content, and, second, by increasing digital revenue.

The company is fighting the long-term secular decline in packaged games with increased online functionality. It is developing expanded, high-margin versions of its franchise games, developing “free-to-play” games for that growing market segment (which has also been a focus at King) and introducing new game concepts.

Argus said in its report:

We think the King acquisition is a bold move into mobile digital gaming for Activision. While King has been criticized as being unable to replicate the success of “Candy Crush” with a new blockbuster franchise, Activision management was suitably impressed by King’s ability to extend the life of “Candy Crush” by launching follow-on games. The synergies in the crosspollenization/cross-promotion of the two companies’ intellectual property are obvious; the acquisition will also give Activision access to the strategic talent behind the most successful mobile video game franchise. In addition, King should strengthen Activision’s presence in the Asia Pacific region, which is currently ATVI’s weakest geographic segment.

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Shares of Activision were up 2.6% to $34.72 Wednesday, with a consensus analyst price target of $34.72 and a 52-week trading range of $18.43 to $37.86.

King shares were last seen trading up 0.4% to $17.85. The consensus price target is $20.17, and the 52-week range is $11.63 to $18.00.