Markets

Why Wall Street changed its mind on Activision Blizzard

Key Points
  • The video game publisher is seeing success with its World of Warcraft Classic game, and it's launching a version of Overwatch for Nintendo's Switch.
  • Since Aug. 14, the stock has climbed more than 20%.
  • The company had a miserable winter, with its stock price cut in half between last October and mid-February.
Spectators and fans react during the Activision Blizzard Overwatch League Grand Finals at Barclay Center in Brooklyn, New York.
Christopher Lee | Bloomberg | Getty Images

Activision-Blizzard is leaning on its legacy video games following a brutal few months and a round of layoffs, and Wall Street is buying in.

The video game publisher's stock earned multiple upgrades this week as it continued its recent climb, gaining 7.9%. The company has seen success with a throwback version of its World of Warcraft franchise, and announced this week that it was making a version of its Overwatch game for Nintendo's Switch.

The company had a miserable winter, with its stock price cut in half between last October and mid-February. The company cut jobs and said it was going to focus more on its key franchises. Now, with new updates and sequels coming for popular brands such as Overwatch and Diablo, the stock is picking up steam.

"They did a good job of framing 2019 as a transition year and sort of the bottom in terms of the content cycle. We're expecting a lot more coming in 2020," said Jeff Cohen, a research analyst at Stephens.

Bank of America upgraded to stock to Buy from Neutral in late July, with analysts writing the company was "on the verge of an inflection point." Since Aug. 14, the stock has climbed more than 20%.

Other analysts are jumping on board, with Stephens upgrading the stock to overweight from equal-weight on Thursday and giving the stock a target price of $65 per share. Putting Overwatch on the Switch gives the company another avenue to monetize its user base, Cohen said.

"There's a great deal of overlap between the Switch install base and the Xbox and Playstation install base, but I do think there's an opportunity out there for them to basically sell a second copy to people who already have the game," Cohen said.

BMO's Gerrick Johnson raised the stock to Outperform from Market Perform and gave it a target price of $60 per share, citing a "stronger conviction that the company's restructuring efforts and investments in core games like Call of Duty and World of Warcraft will generate an improvement in financial performance."

The popularity of World of Warcraft Classic, released last month, has surprised analysts. Two weeks after launch, the franchise is averaging roughly 200,000 viewers per hour on live-streaming platform, Twitch, according to Twitch statistics website Sullygnome.com. The game only hit that mark occasionally during peak viewing hours in the weeks before the release.

Cohen said he expected that launch would be a retention tool but is instead bringing in new subscribers, signaling an appetite among consumers for more World of Warcraft games that are in the pipeline.

New games are a risky proposition for companies that rely heavily on consumer sentiment. Electronic Arts is one of the latest examples of that, receiving a tepid reception for its new game Anthem earlier this year.

For this reason, Activision Blizzard is not alone in focusing on old intellectual property in the video game industry, though Cohen said he still thinks the company is working on new games.

"I do think a big part of the strategy is to focus on those kind of tent pole brands," Cohen said.

Cohen said he expects another World of Warcraft expansion later this year, an Overwatch sequel or expansion next year, and Diablo 4 in 2021. The company is expected to clarify its release schedule at its BlizzCon conference in November.