Activision Blizzard - ATVI (Buy)
Activision Blizzard is one of my favourite investments (and @userfy_123’s by the sound of it!) It’s a high growth, strong quality company, with growing reoccurring revenue, that appeals to a range of demographics. It’s a growing sector, and few companies are better positioned to take advantage of this.
Tomorrow, Tuesday 5th May, they will be announcing their first-quarter results. It would be easier to do some analysis after the quarterly results, but I have a strong long term view on ATVI.
From Google Finance
What Is Their Business?
ATVI describe themselves as a leading standalone interactive entertainment company. Who delight hundreds of millions of monthly active users around the world through franchises including Activision’s Call of Duty®, Spyro™, and Crash™, Blizzard Entertainment’s World of Warcraft®, Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®, and King’s Candy Crush™, Bubble Witch™, and Farm Heroes™. As someone who has played Call of Duty and Diablo, delight isn’t the word that comes to mind. Enough about my terrible gaming ability and onto why this is an exciting company.
The important piece to know here is, ATVI is four companies in one. You have the game publisher and developer Activision started in 1979, but these days best known for publishing Call of Duty (they don’t develop the game, it rotates between a few development studios.) There is the giant which is known as Blizzard Entertainment set up in 1991, who is best known for smash hits such as World of Warcraft, Starcraft, Overwatch, and Diablo. Then, we have King which was created in 2003, who rode the casual gaming wave (and continue to) with their never-ending, money-sucking, app Candy Crush. Finally, have Major League Gaming originally founded in 2002, which focuses on competitive gaming, MLG is the go-to location to watch top tier esports champions battle it out for cash prizes (to date they have paid out over $9.5m in cash prizes.)
From ATVI Q4 Powerpoint
Publishing games, where you bankroll development but in return, you get paid first, have a lot of control (if you want), control the distribution and sale price and control the IP. Additionally, for in-store microtransactions and additional services, you get even more revenue post-launch.
Developing games, where you have creative control, end-user engagement, can follow trends or even create new ones, and potentially create new IP if you have the distribution channels (which they do.)
Mobile gaming, with both King and Activision pushing more and more into the casual gaming experience, this gives them access to very desirable demographic, own income, spare time, actively seeing a short attention span ease to pickup distraction.
eSports hosting and team creation, where they rent venues to launch massive sponsorship backend events to see the best players around the world compete.
Own digital gaming distribution channel, with Battle.net they control even more of the user experience, pay less out to 3rd parties as they have their channel, and give them more control over their in-app purchases and digital sales.
Movies, physical merchandise, and other licence maximising activities through their studio arm. While this has been a bit quiet this could be a big step into more forms of media e.g. the Warcraft Movie.
From ATVI Q4 Financial Model
That graph is measured in millions. $5.4~ billion in bookings last four quarters, 409 million monthly active users over the final quarter. Let’s just say they are big.
What About Competitors?
I wanted to add in some comparisons to other companies to give you a feel for where they sit, these screenshots are from Genuine Impact.
Activision Blizzard
Take-Two
Electronic Arts
Ubisoft
Tencent owns a lot of developers and publishers as well (not just in China but globally), but they are a bit trickier to invest in. If you have access to the Polish exchange you might be interested in CD Projekt as well.
Financial Growth
Let’s stay focused on ATVI and it’s last earnings report. It’s worth noting that ATVI hasn’t announced any guidance changes since Q4. This likely means we are expecting positive results tomorrow. We have already seen a lot of digital and gaming related firms getting a strong boost in user numbers and spending due to national lockdowns. This will likely boost the revenue and engagement figures for ATVI too.
The expectation for Q4 was a dip in revenue, $1.6m compared to $1.8m a year ago but with microtransactions to increase. With no major new release, this would have been a fair expectation.
Expect there has been a major release. Call of Duty: Warzone, is their new free-to-play battle royale which launched in March. This has been downloaded over 50 million times already. If you haven’t heard of the free-to-play strategy before it’s a popular approach which has seen a resurgence with “battle royale” game modes.
I expect this will cause ATVI to beat expectations for this quarter and even post a very positive outlook. I would say the cloud we potentially will see is a slow down for future projects due to the lockdown, and while COVID-19 is providing a boost now, we don’t know how long that uptick will last.
From ATVI Q4 Report
While we are seeing the lockdown ease across the globe, it’s worth knowing where ATVI is making its money, it still has a strong American base followed by the European nations. While most of their services look to maximise reoccurring revenues, I am expecting to see a drop off when it comes to monthly active users. Across all their business lines people have free time right now, with summer starting and no new games lined up for the next quarter I expect the next three months will be unpredictable and largely driven by when lockdown ends. I expect a dip in activity immediately following the lockdown ending or easing.
From Genuine Impact
What we do have is a very positive and strong outlook from the sell-side analysts. There is a very strong buy consensus. The target prices are roughly where we are right now until the quarterly earnings come out. I wouldn’t be surprised to see another 5-7% increase in target price for the next quarter, even with a large number of pandemic unknowns.
Summary
We aren’t at all-time highs but I expect this year we can hit them. With some punchy future games lined up over the next two/three years, we can expect some massive payoffs. With strong profitability through their own digital distribution channel, extremely loyal customer base, and excellent capital allocation this is a very strong quality play.
However, this isn’t a cheap stock to buy right now. There is a lot of expectation built into the price. Right now we are already at the target price for the quarter, which doesn’t leave a lot of room for any negative news whatsoever. Making it very likely even a great result won’t be good enough and we will see a price correction following the announcement.
If you take an annual view, this is a very strong momentum buy. Right now one of my favourites. Excellent forecasted revenue growth, a CEO who is closely aligned to the EPS increasing, and extremely strong future sentiment. It has room to grow both in terms of revenue and in terms of price per share.
Let me know what you think of this analysis, I’ve changed the style a little to see if it’s more informative. We’ll see what the stock looks like on Wednesday after earnings and some trading activity!