We've been asking ourselves recently if the market has placed a fair valuation on Activision Blizzard. Let's dive into some of the fundamental values of this large-cap Technology company to determine if there might be an opportunity here for value-minded investors.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Activision Blizzard, Inc., together with its subsidiaries, develops and publishes interactive entertainment content and services in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 27.16 and an average price to book (P/B) ratio of 6.23. In contrast, Activision Blizzard has a trailing 12 month P/E ratio of 34.6 and a P/B ratio of 3.2.
Activision Blizzard's PEG ratio is 1.7, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
An Exceptionally Strong Balance Sheet:
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $6,489 | $8,086 | $8,803 | $7,528 |
| Gross Margins | 67.7% | 72.0% | 73.7% | 70.5% |
| Operating Margins | 26.8% | 35.0% | 37.9% | 22.1% |
| Net Margins | 23.16% | 27.17% | 30.66% | 20.1% |
| Net Income (MM) | $1,503 | $2,197 | $2,699 | $1,513 |
| Net Interest Expense (MM) | 26 | -87 | -95 | -108 |
| Net Interest Expense (MM) | $26 | -$87 | -$95 | -$108 |
| Depreciation & Amort. (MM) | -$553 | -$446 | -$440 | -$319 |
| Earnings Per Share | $1.95 | $2.82 | $3.44 | $2.37 |
| EPS Growth | n/a | 44.62% | 21.99% | -31.1% |
| Diluted Shares (MM) | 771 | 778 | 784 | 786 |
| Free Cash Flow (MM) | $1,715 | $2,174 | $2,334 | $2,129 |
| Capital Expenditures (MM) | -$116 | -$78 | -$80 | -$91 |
| Net Current Assets (MM) | $252 | $2,493 | $5,099 | $6,329 |
| Current Ratio | 2.5 | 3.41 | 5.21 | 4.07 |
| Long Term Debt (MM) | $2,675 | $3,605 | $3,608 | $3,611 |
| Net Debt / EBITDA | -0.99 | -1.6 | -1.84 | -1.59 |
Activision Blizzard has strong margins with a stable trend, a steady stream of strong cash flows, and an excellent current ratio. The company also benefits from low leverage, growing revenues and decreasing reinvestment in the business, and positive EPS growth. However, the firm has slimmer gross margins than its peers.
