A wise bet on Warren Buffett

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

Video game stocks flourished at the start 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, famous among gamers for titles such as Diablo, Crash Bandicoot, World of Warcraft, candy Crush, Surveillanceand of course, Call of Duty.

These aren’t just game titles; they are iconic franchises for gamers everywhere. Yet the COVID-19 lockdowns are now mostly lifted, and game 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.

It’s a tall order, but Activision Blizzard should be up to it. As we’ll find out, the company is expanding into a field with applications far beyond gaming – and besides, a legendary investment guru is racking up a sizable stack of stock.

Rapidly evolving technology

Activision Blizzard has been mostly directionless in 2022 so far, but it’s held up pretty well given the ongoing tech stock rout. 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.

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

To provide some background information, Activision Blizzard acquired interactive entertainment company King in 2016. With 250 million monthly active users in Q1 2022, King has game studios on multiple continents and has developed over 200 games.

Now, the subsidiary of Activision Blizzard has a subsidiary. There are reports that 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 which could also have other applications. Could this acquisition signal an expansion of Activision Blizzard’s business model?

It’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 evolving rapidly, and by increasing our investment in this area, we plan to deliver even more creative content to our 250 million monthly gamers… [in Q1 2022] worldwide.”

Buffett ups the ante

Another notable development with Activision Blizzard is that one of the world’s most successful investors is taking, and even increasing, a stake in the video game maker. He’s no tech guru, but he certainly knows good value when he sees it.

Berkshire Hathaway (BRK.A, BRK.B) CEO Warren Buffett appears to like Activision Blizzard stock in 2022, as Berkshire has reportedly increased its stake in Activision to around 9.5% year-to-date. Surprisingly, Berkshire is estimated to have bought around $4.5 billion worth of Activision stock in 2022 so far.

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

It has been suggested, however, that Buffett has another reason to up the ante with Activision Blizzard stock. In particular, Buffett might anticipate that Microsoft (MSFT) agreement to buy Activision for $95 per share will be reached. It’s an interesting bet to make since, apparently, there has been some pushback from US lawmakers regarding the proposed Microsoft-Activision transaction.

Really, there’s no way to know for sure what Buffett was thinking when Berkshire increased its holdings in Activision Blizzard. Was he thinking only of the passage of Microsoft-Activision? It might or might not play out, and Buffett isn’t known for playing recklessly on stocks without a solid foundation. Most likely, he carefully researched Activision Blizzard as a company and determined that it was currently undervalued by the market.

The Taking of Wall Street

As far as Wall Street is concerned, ATVI stock is priced as a moderate buy based on five buy ratings and three hold ratings. Activision’s average price target is $95.63, implying an upside potential of 28.1%.

Takeaway meals

The idea here isn’t just to load up on Activision Blizzard stock because Buffett and Berkshire have taken a stand. Instead, investors should conduct their own due diligence and determine for themselves whether Activision deserves a place in your technology stock portfolio.

At the very least, we can say that the shares are trading at a reasonable valuation and Activision Blizzard is paying a dividend. Moreover, Activision is venturing indirectly into the high-conviction world of AI, which suggests a possible expansion of an already dynamic business model. So don’t hesitate to do like Buffett and consider going long in Activision Blizzard stock.

Disclosure