by Clement Thibault
Activision Blizzard Inc (NASDAQ:ATVI), the developer and publisher of online video games, reports Q2 earnings on Thursday August 4, after the market closes.
1. Earnings and Revenue Forecast
The Wall Street consensus regarding Activision Blizzard is an EPS of $0.45 with a top line of $1.49B. This would represent spectacular growth from the past year's 0.13$ EPS and $759 million revenue. The company also raised its guidance recently, saying it now expects $1.78 EPS for the full year. Wall Street's expectations for the year are a bit higher, at $1.88. While the stock price has jumped over 50% during the past year—from $25 in August 2015 to just under $ 40 yesterday—there is still substantial growth potential for Activision Blizzard.
2. Traditional Desktop Games
The company operates as two segments, Activision Publishing and Blizzard Entertainment. Between them, they own and publish some of the most popular gaming franchises currently available. Activision's portfolio includes the Call of Duty franchise with over $10B in sales thus far and a new release each year. Blizzard's portfolio includes the world's most massive, multiplayer online role-playing game of all time, World of Warcraft. It also publishes Heathstone, an online video card game with 50 million players, plus the company's most recent hit, Overwatch. Launched in May, Overwatch was the number-one selling title in June, indicating that the company isn't necessarily relying on legacy games to stay profitable.
Clearly, it continues to be capable of pumping out fresh hits, no small trick in the competitive environment in which it operates. This goes a long way toward insuring that the company should remain profitable even as the popularity of its legacy games inevitably declines. After seeing falling subscription numbers for World of Warcraft, Blizzard decided not to reveal specific numbers going forward but rather to focus on newer games. World of Warcraft's newest expansion, Legion, is scheduled to be released on August 30th and Call of Duty's latest edition, Infinite Warfare is expected to be available in November.
3. Mobile Customers
This past February, ATVI purchased mobile game maker King Digital Entertainment, for $5.9B. King publishes the widely popular game series Candy Crush. Overall, King Digital has approximately 500 million monthly users across its mobile games platform. During Q1, King Digital's contribution to Activision Blizzard's revenue was $200M, or about 23% of total earnings.
That's a drop in the bucket compared to what ATVI paid for the company. The real value King brings to ATVI hinges on two factors: its ability to monetize its user base, and perhaps more significantly, its future success at bringing additional mobile users to Activision Blizzard. Right now, all King Digital's revenue comes from one-time game purchases; Once the software is purchased, additional usage is completely free as well as ad-free. If King were to introduce advertising into its game platforms—and King's CEO Riccardo Zacconi has hinted at this possibility—as little as a dollar per user would boost the company's revenue by 250%.
4. E-Sports Segment
E-Sports refers to the fast-growing video game segment revolving around teams and competition. Most of the time, E-Sports are organized video game tournaments with an audience watching—whether in physical proximity or remotely via computer or TV. The segment is seeing robust growth, and the $325 million in revenue generated industry-wide through E-Sports in 2015 is expected to rise to $463 million in 2016.
The 2015 League of Legends World Championship Final drew more than 36 million unique viewers over the course of the championship final. Major League Baseball's World Series Game 5 drew 17 million viewers. The National Basketball Association Finals' Game 7 was watched by 31 million people. The combined viewership for hockey's six-game Stanley Cup series was a little over 23 million. Activision recently purchased the E-Sports platform Major League Gaming (MLG), for $46M. Through MLG, the company intends to set up a gaming television channel, in order to capitalize on the popularity of E-Sports, while growing momentum both through its games and its viewership.
5. Movie Studio
Activision Blizzard appears to be doing everything in its power to make sure that no money gets left on the table. It has even managed to monetize one of its most popular series, World of Warcraft, through the June 10 US premier of the movie Warcraft. While the movie wasn't a blockbuster in the States, grossing only $47M, it was a hit in China, where it grossed over $200M; Worldwide it brought in over $430M in revenue.
ATVI has already announced its next production, a movie based on its popular game Call of Duty. It's also exploring the possibility of a sequel to Warcraft. The Hollywood Reporter revealed that Warcraft's online streaming rights for the Chinese market have sold for a record sum for a foreign title, though exact figures were not disclosed. Its US debut may not have been exactly stellar, but the movie's international success undoubtedly strengthened the World of Warcraft brand overall.
Conclusion
Currently, the company trades for $39.75 a share, with a P/E ratio of 35. However, the company recently raised guidance for 2016 to $1.78, taking the forward P/E to an acceptable 22.
One thing we really like about ATVI is the industry in which it operates. The gaming universe continues to expand. According to a recent report, 42% of Americans play video games for 3 hours or more per week, and while hard-core desktop gamers are predominantly young males between 13-30, more casual, mobile gamers range across all ages and genders.
With a $29B market cap, ATVI is bigger than its nearest competitor Electronic Arts (NASDAQ:EA), which publishes FIFA and Battlefield, and is now valued at $23B. We believe Activision Blizzard is extremely well positioned to take advantage of gamer engagement and growth. Its purchase of King Digital indicates it's in tune with the expanding mobile gaming trend, expected to grow by $15.6B through 2019. It is also on top of the growing E-Sports industry, as its acquisition of Major League Gaming indicates. With a solid and loyal core of legacy followers, the proven ability to continue creating hits, and the management savvy to recognize and capitalize on growth opportunities, Activision Blizzard should easily be able to continue its impressive upward price momentum.