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Activision Blizzard Stock: A Savvy Warren Buffett Bet

TipRanks - Fri Jun 17, 5:33PM CDT

Activision Blizzard (ATVI) is best known as a developer and manufacturer of video games. I am bullish on the stock.

Video game stocks thrived during the onset of the COVID-19 lockdowns in 2020, as people spent their time engaging in digital battles and adventures. Among the beneficiaries of this trend was Activision Blizzard, which is famous among gamers for such titles as DiabloCrash BandicootWorld of WarcraftCandy CrushOverwatch, and of course, Call of Duty.

These aren't just game titles; they're iconic franchises to gamers around the world. Yet, the COVID-19 lockdowns are now mostly lifted, and gaming companies like Activision Blizzard must prove to Wall Street that their businesses are still viable as the video-game market becomes an increasingly crowded field.

That's a tall order, but Activision Blizzard should be up to the task. As we'll discover, the company is expanding into a field with applications far beyond the gaming realm - and besides, a legendary investing guru is accumulating a sizable stack of shares.

A Quickly Moving Technology

Activision Blizzard has been mostly directionless in 2022 so far, but it has held up fairly well considering the technology-stock rout that's been in progress. The stock has managed to stay in the $70s lately, and long-term investors can target the 52-week high of $96.15 as a good place to consider taking profits.

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Regarding the company itself, an Activision Blizzard subsidiary business just made a move that could have implications in the gaming world and beyond. If you're bullish on machine learning in the 2020s, then you'll definitely want to take note of this recent development.

To provide some background info, Activision Blizzard acquired interactive entertainment company King in 2016. With 250 million monthly active users as of 2022's first quarter, King has game studios on multiple continents and has developed more than 200 games.

Now, Activision Blizzard's subsidiary has a subsidiary. Reportedly, King has acquired Peltarion, a Swedish artificial intelligence (AI) software company. Peltarion has helped a number of companies, and even NASA and Harvard University, benefit from AI.

In other words, Activision Blizzard is now indirectly involved in AI, which is an essential component of modern video games but could also have other applications. Could this acquisition signal a broadening of Activision Blizzard's business model?

That's entirely possible, but for now, King and Peltarion apparently plan to apply AI to the gaming segment. To quote King President Tjodolf Sommestad, Machine learning technology is moving quickly, and by increasing our investments in this field, we expect to deliver even more creative content to our 250 million monthly players... [in Q1 2022] across the globe.

Buffett Ups the Ante

Another notable development with Activision Blizzard is that one of the world's most successful investors is taking, and even raising, a stake in the video game maker. He's not a technology guru, but he sure knows a good value when he sees it.

Berkshire Hathaway (BRK.ABRK.B) CEO Warren Buffett seems to like Activision Blizzard stock in 2022, as Berkshire has reportedly increased its stake in Activision to roughly 9.5% since the start of the year. Amazingly, it's been estimated that Berkshire has purchased around $4.5 billion worth of Activision shares in 2022 so far.

Why would Buffett favor Activision Blizzard stock? He doesn't seem like a video game wizard, but he likes value stocks, and Activision's trailing 12-month P/E ratio is quite reasonable at 23.7. Buffett also likes dividend stocks, and Activision pays a forward annual dividend yield of 0.64%.

It's been suggested, though, that Buffett has another reason for upping the ante with Activision Blizzard stock. In particular, Buffett might anticipate that Microsoft's (MSFT) deal to buy out Activision for $95 per share will go through. This is an interesting bet to make since, apparently, there's been some pushback from U.S. lawmakers regarding the proposed Microsoft-Activision transaction.

Really, there's no way to know for certain what Buffett thought when Berkshire ramped up its holdings in Activision Blizzard. Was he only thinking about the Microsoft-Activision going through? This might or might not pan out, and Buffett isn't known for recklessly gambling on stocks without a firm basis. Most likely, he carefully researched Activision Blizzard as a business and determined that it's currently undervalued by the market.

Wall Street's Take

Turning to Wall Street, ATVI stock comes in as a Moderate Buy based on five Buy ratings and three Hold ratings. The average Activision price target is $95.63, implying 28.1% upside potential.

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The Takeaway

The idea here isn't to just load up on Activision Blizzard shares because Buffett and Berkshire took a position. Rather, investors should conduct their own due diligence and determine for themselves whether Activision deserves a place in your tech-stock portfolio.

At the very least, we can say that the shares are trading at a reasonable valuation, and Activision Blizzard does pay a dividend. Besides, Activision is indirectly venturing into the high-conviction world of AI, which suggests a possible broadening of an already dynamic business model. So, don't hesitate to be like Buffett and consider taking a long position in Activision Blizzard stock.

Disclosure

Paid Post: Content produced by TipRanks. The Globe and Mail was not involved, and material was not reviewed prior to publication.