Activision Blizzard: Be Careful Shorting It amid Controversy

Activision Blizzard (ATVI) develops and publishes interactive entertainment content. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Confidence from Heavy Hitters Irrespective of Scandals

The stock faced a vicious sell-off at the turn of the second quarter after the company was involved in a sexual misconduct scandal. The news is obviously concerning from a moral level, but this article aims to look out for investors’ interests.

The heavy hitters in the hedge fund space seemingly aren’t concerned that the news will affect the stock price any longer.

According to TipRanks’ 13-F tracker, hedge funds added 2.5 million shares of Activision Blizzard over the past quarter, with renowned fund managers such as Richard Atwood, Lee Ainslie, and Joel Greenblatt moving significant weight into their portfolios.

Further to the 13-F data is L1 Capital’s backing of the company’s stock. Upon buying a portion of Activision’s stock float, the investment firm stated that: “Activision Blizzard’s share price is often driven by short-term sentiment, both positive and negative.”

Because volatility and informational arbitrage have been prevalent factors in the stock’s recent price movement, I can imagine hedge fund buying of Activision stock commencing well into 2022. Predicting hedge fund buying/selling patterns is challenging, and I’d take this as a severe risk from a retail investor’s perspective.

Valuation Upside

You rarely see a technology stock with a P/E ratio lower than the S&P 500’s. Activision Blizzard’s PE of 17.43 is trading at a 22.9% discount to the S&P 500’s current P/E ratio, and it’s also trading at a five-year discount relative to itself worth 66.5%.

Other key metrics also suggest that the stock is undervalued with Activision’s price-to-sales and price-to-cash-flow ratios trading at five-year average discounts worth 27.2%, and 35.1%, respectively.

A final valuation point worth discussing is the balance sheet. Activision has grown its intangible assets (excluding goodwill) by 30% year-over-year. There’s always a possibility that this, along with a year-over-year research & development increase of 20%, could form a cohesive partnership to amplify the firm’s revenue in the coming years.

Wall Street’s Take

Wall Street analysts are generally bullish on the stock. Of 19 ratings, there are 13 Buys, five holds, and only one sell rating. The average Activision Blizzard price target on the street is $90.44, implying 53.1% upside potential.

Concluding Thoughts

Sexual misconduct is something we should all aim to resolve in whatever capacity we can. However, this article aims to describe the risks of shorting the stock at the moment. A misconduct act can drive stock prices down, but it can’t be looked at in isolation when making a bearish investment decision.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.