"The primary reason to own the stock is because new digital revenue streams (microtransactions, full-game downloads) are transforming the company into a more recurring profitable model," Jefferies analysts wrote in a March 21 note.
The company generated $4 billion in microtransaction revenue in 2017 and has suggested that number could grow by double digits this year. As Jefferies pointed out, that could mean upwards of $400 million in incremental microtransaction revenue. Analyst Timothy O'Shea said that segment represents the highest-margin part of Activision's business.
Activision has guided for full-year 2018 earnings of $2.50 a share, which O'Shea said he finds conservative, "especially as nascent ads, mobile game and eSports businesses scale through 2018 and into 2019."
While advertisements might be a "modest contributor" to Activision's top line in 2018, the revenue source could become a $1 billion opportunity over time, Jefferies said. That's due in large part to Activision's enormous, engaged audience: It has about 400 million users spending 50 minutes per day on its platform, more than both Twitter Inc. (TWTR) and Snap Inc. (SNAP) .
Additionally, Activision will be able to apply revenue per user comps to its 290 million Candy Crush users, implying "meaningful" revenue upside in the near- to medium-term. That upside could potentially be in excess of $900 million on a revenue base of $7 billion, Jefferies said.
O'Shea said there is also upside for Activision's mobile game pipeline, surmising new releases could hit the market as early as the back half of this year. "Mobile is the biggest and fastest growing of all the gaming markets, and ATVI is developing a number of games based on its proven IP (like Nintendo)," Jefferies said.
Activision's eSports Overwatch League could also contribute between $75 million and $100 million to Activision's revenue in 2018, a figure that could double the following year. The league attracted 10 million viewers in its opening weekend, plus it has major sponsors including HP Inc. (HPQ) , Intel Corp. (INTC) and T-Mobile Inc. (TMUS) , Jefferies pointed out.
Jefferies rated Activision stock as a buy on its franchise picks list. Analysts have assigned an $86 price target, implying upside of 20.5% from the stock's closing price Tuesday. Activision shares have climbed more than 46% in the last year.