A blizzard of action in the gaming sector

Even though yesterday snapped a six-day win streak for the S&P 500 (SPX), the tech-rich Nasdaq 100 (NDX) held its ground for most of the day, and video-gaming company Activision Blizzard (ATVI) did more than that by rallying more than 1% intraday and closing higher.

If you haven’t heard of Activision, you’re definitely not a gamer, because it’s the company behind the uber-popular Call of Duty, Destiny, and World of Warcraft franchises—the first two being the No. 1 and No. 2 bestselling games of 2017.1

Activision’s relative strength isn’t a recent phenomenon, though, as the following comp to NDX shows:

Activision Blizzard (ATVI) and Nasdaq 100 index (NDX), 1/19/17 – 2/20/18

Source: OptionsHouse

Gaming stocks as a whole have been strong even by tech standards. The first-ever game-stock ETF has outperformed the NDX by approximately 40 percentage points since its launch in March 2016. Even after correcting from its January 31 record high of $74.34, ATVI is still up around 12% this year and 59% from year ago.

Although it may seem like the prevailing dynamic of the video-game industry would be a perennial battle of creating compelling new games and upping the experiences of old ones, Activision has made a splash by branching out into eSports—the growing “spectator sport” of watching the best gaming gladiators compete in the digital coliseum.

Activision’s Overwatch League, which launched in January, applies the traditional pro sports league model to videogames: city-based teams of professional “cyber-athletes” who compete in ATVI’s popular Overwatch shoot-‘em-up game, with in-person arena spectator viewing as well as live-streaming of matches.

If you think it’s an idea only tech nerds could love, consider that so far there are 12 global cities/teams participating (including New York, Shanghai, and London), and the owner of one of the teams—the Boston Uprising—is the Kraft Group.

As in Robert Kraft. As in the owner of the New England Patriots, a football team that’s done OK in the NFL. Los Angeles Rams owner Stanley Kroenke is another pro sports kingpin who shelled out $20 million for an Overwatch franchise. Also, Activision has hooked up with Amazon’s (AMZN) Twitch service to be the league’s digital broadcast partner.These are some heavy hitters.

For those not clued into the magnitude of the videogame universe, Overwatch has a 35-million-strong player base3—quite the potential audience for its eSports league. The initial match on January 10 drew as many as 350,000 viewers on the Twitch platform alone.4

Activision Blizzard (ATVI), 11/16/2017 – 2/20/18

Source: OptionsHouse

After Activision’s Q4 earnings release on February 8 (which beat earnings and revenue estimates), many analysts upped their price targets for ATVI, within a rough range from $80 to Credit Suisse’s $83.5

And yesterday, trading was hot in the ATVI March $75 call options (a strike price just above the January 31 high), with volume nearing 25,000 with a more than half the trading session remaining.

Game on.

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1 Hypebeast. These Are the Best-Selling Video Games of 2017. 12/28/17.

2 Bloomberg. Activision Taps Amazon's Twitch to Televise New Esports League. 1/9/18.

3 GamesIndustry.biz. Overwatch hits 35 million players. 10/17/17.

4 Forbes. Overwatch League Posts Solid First-Night Numbers; Second Night Underway. 1/11/18.

5 StreetInsider. Activision Blizzard (ATVI) PT Raised to $83 at Credit Suisse; 'Mobile Renaissance to Ramp in 2018'. 2/9/18