Yahoo Finance What Does Activision Blizzard, Inc.'s (NASDAQ:ATVI) P/E Ratio Tell You?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Activision Blizzard, Inc.'s (NASDAQ:ATVI) P/E ratio to inform your assessment of the investment opportunity. Activision Blizzard has a price to earnings ratio of 36.38, based on the last twelve months. That is equivalent to an earnings yield of about 2.7%.
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How Do You Calculate Activision Blizzard's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Activision Blizzard:
P/E of 36.38 = $73.920 ÷ $2.032 (Based on the year to March 2020.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
How Does Activision Blizzard's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Activision Blizzard has a higher P/E than the average company (20.5) in the entertainment industry.
Its relatively high P/E ratio indicates that Activision Blizzard shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Activision Blizzard's earnings per share fell by 14% in the last twelve months. But it has grown its earnings per share by 9.7% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Activision Blizzard's Balance Sheet
Activision Blizzard has net cash of US$3.6b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Activision Blizzard's P/E Ratio
Activision Blizzard has a P/E of 36.4. That's higher than the average in its market, which is 14.3. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
