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Jefferies says this growth stock is a buy. Here’s what I’d do

A still from Activision game "Call of Duty: Black Ops Cold War"
Image: Activision

One of the most exciting sectors as we head into 2022 and beyond is video gaming. In fact, gaming is now by far the biggest entertainment industry by revenue, surpassing film and music. This is why there are a lot of growth stocks in the video gaming sector to choose from.

Just this week, Jefferies placed a ‘buy’ recommendation on Activision Blizzard (NASDAQ: ATVI). The target price was set at $90 a share. Last week, the share price closed at $62. Is this an opportunity for me to buy?

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Is ATVI a growth stock?

I think it’s safe to say that Activision Blizzard has been a growth stock in the past. The share price rose a huge 600% from 2013 to 2018. But recently, the share price has really underperformed other US growth stocks. In a year, the share price has fallen nearly 19%. And from the high in February, the stock is down a huge 41%.

But it’s important for me to review the financials. This says to me that the company is still a growth stock. For example, profit before tax is forecast to grow an impressive 30% this year. It’s notable that this profit growth is expected to slow to 5% the following year. But it picks back up again to 23% for 2023. Video game stocks do sometimes have inconsistent growth that depends on game release schedules.

The valuation is undemanding in my view. Indeed, on a price-to-earnings (P/E) ratio, the shares are valued on a multiple of 16 for this year. This is a steal for a growth stock nowadays. The S&P 500 is valued on a forward P/E of 23, so ATVI might be showing value at this share price.

Recent share price weakness

So what has caused this growth stock to underperform lately? The company does boast huge game franchises, such as World of Warcraft and Call of Duty, after all.

Well, it has been dealing with a host of accusations over employee abuse and harassment. The CEO this week was even reported to be considering stepping down, which would no doubt cause further disruption at the business. Worryingly, employees even staged a walkout in November, demanding that the CEO resign due to the allegations at the company.

It’s understandable, then, why the share price has weakened. Accusations like these should never happen. But simply focusing on the business aspect, it may have caused huge disruption in gaming development schedules, not to mention poor employee morale. And there’s a question on whether investors would want to buy the shares of a company where employees aren’t being treated right.

What I’d do

I really like the prospects for continued growth of the gaming sector. It’s the biggest entertainment industry, and e-sports is an accelerating trend that I think will explode from here.

The company still shows impressive earnings growth, and I believe it can still be classed as a growth stock. Its valuation is also attractive, in my view.

However, for now, I’m going to see how the situation plays out. If the CEO does step down, and the company is able to work through its controversies, I think there’s a promising growth stock here. But I feel there might be better stocks to buy just now.

This is another US growth stock worth considering...

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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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