Activision’s main business line is the global development and publishing of interactive entertainment content and services. These video games are distributed through multiple content and services like; gaming consoles, computers, and mobile devices. There main competitors are Sony, Microsoft, Electronic Arts, and Nintendo. In this blog I am going to tell you why you shouldn’t invest in Activision.
A widely known formula used by many investors is the Weighted Average Cost of Capital (WACC). The WACC helps you determine what the company is expected to pay on average to all of its security holders (investors) to finance its assets. Using the Capital Asset Pricing Model (CAPM) I got 14.5% for Activision’s cost of equity. Then, once I plugged that into the WACC I got a 10.1% discount rate.
If you look at my spreadsheets the share price of Activision will only be $56.56 by 2023. If you look at the share price of Activision as of today (9/3/2019) it is currently at $51.06. So, after holding this stock for 5 years you would only see a 10.78% return which is a 2.15% annual return. If you would compare this to investing in SPY which is an ETF that tracks that S&P500 you would on average, see an annual 7% return.
After doing sensitivity analysis I was able to find that it is the discount rate or the WACC that is keeping the annual return down. When I adjusted this to 5% instead of the 10.1% that was calculated the 2023 share price jumped to $69.85, this would result in a 7.36% annual return and a total return of 36.8%.
The 2.15% annual return that you would receive from Activision isn’t worth your time investing in it. There are so many better investment choices that can produce higher returns. Until Activision can lower their discount rate, I don’t see the advantage of buying their stock.