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Investment Overview for Activision Blizzard (NYSE:ATVI)
- Microsoft Console Revenues: We currently expect Microsoft console revenues to increase in 2014, and thereafter increase to $2 billion by the end of the Trefis forecast period. The aggressive growth is based on the strength of the Call of Duty and other popular franchises on the XBox One. However, if the Call of Duty franchise fails to impress gamers in the future and Microsoft console revenues drop to $0.79 billion by the end of the Trefis forecast period, there could be a downside of 20% to our Trefis price estimate. Conversely, if Call of Duty carries the growth that it has shown historically and reaches $2.32 billion by the end of the Trefis forecast period, there could be an upside of 6% to our Trefis price estimate for Activision Blizzard.
- Sony Console Revenues: We currently expect Sony console revenues to increase in 2014, and thereafter increase to $1.6 billion by the end of the Trefis forecast period. The aggressive growth is based on the strength of the Call of Duty and other popular franchises on the Sony PlayStation 4. However, if the Call of Duty franchise, as well as Destiny fails to impress gamers in the future, and Sony console revenues just rise to $1.1 billion by the end of the Trefis forecast period, there could be a downside of 10% to our Trefis price estimate. Conversely, if Call of Duty carries the growth that it has shown historically and reaches $1.9 billion by the end of the Trefis forecast period, there could be an upside of 6% to our Trefis price estimate for Activision Blizzard.
Activision Blizzard is a worldwide online, PC, console, handheld, and mobile games publisher.
Activision develops and publishes video games on various consoles, handheld platforms, and the PC platform, through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony PS3, Sony PS4, Nintendo Wii, and Wii U, Microsoft Xbox 360 and Xbox One console systems, Nintendo DS, Nintendo DSi and Sony PlayStation Vita handheld devices, the PC, Apple iPhone, iPad, and other mobile devices.
Blizzard is the leader in terms of subscriber base and revenues generated in the subscription based massively multiplayer online role-playing game (MMORPG) category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online game related service, Battle.net.
Its distribution business consists of operations in Europe that provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software as well as its own publishing operations and manufacture of interactive entertainment hardware.
Call of Duty
Call of Duty is widely regarded as the all-time highest selling third-party gaming franchise in dollar terms. All three of its last editions -- Call of Duty: Black Ops, Call of Duty: Modern Warfare 3, and Call of Duty: Ghosts -- have surpassed the sales records created by their predecessors. The company released the new edition of the franchise: Call of Duty Advanced Warfare in November 2014. It is the first Call of Duty to be unavailable on Nintendo after Call of Duty: Modern Warfare 2. Call of Duty has been the most successful franchise in Activision’s history with a total of around 150 million units sold to date. It leads the FPS genre by a wide margin.
Moreover, Call of Duty Online is one of the biggest online gaming communities in the world, with a huge gamer base and interactive interface.
World of Warcraft
World of Warcraft (WoW) is officially the most played MMORPG throughout the world with a subscriber base surpassing 10 million members. WoW is sometimes referred as the money minting machine for Activision Blizzard as margins in the MMORPG business are in the range of 80-85%, the highest amongst all divisions. However, the company has been witnessing a decline in the subscriber base of the franchise, due to strong competition from other free-to-play online MMORPGs in the market.
Sustained demand for Xbox One and Sony PlayStation 4
Both major gaming consoles, the X-Box One- and the PlayStation 4, are just one year old. However, the demand for these new consoles is still strong. According to NPD, gamers spent nearly $1.6 billion on hardware over the last six months, up 102% year-over-year (y-o-y). This indicates the sustained popularity of the new consoles among the gamers.
Lagging Software Sales in the market
Over the last 12 months, top game developers have released very few AAA titles in the market. According to NPD, consumer spending on new physical game sales over the last six months in the U.S. was nearly $1.8 billion, down 11% y-o-y, primarily due to a lack of core titles for new consoles. With the launch of core titles by these companies just before the holiday season, this might provide a slight push to software sales. However, looking at the overall trend, the gamers have started opting for digital sales of games rather than physical title sales.
Gaming industry changing landscape from retail to digital
The video gaming industry has been changing from retail towards digital. This is evident by the fact that a growing number of games are being published digitally. Casual browser-based gaming and mobile gaming have become a significant part of gaming revenues and are expected to continue to perform well in the future.
Activision Blizzard has also changed its strategy to focus its sales through a mix of retail and digital gaming products. The DLC (DownLoadable Content) map packs for Call of Duty: Ghosts have performed exceedingly well and the trend is expected to continue.
Emerging new platforms such as smartphones, tablets, and social networking sites
The increasing digitization of the video gaming industry has ensured that video games won't stay limited to consoles and handhelds, rather that smartphones, tablets, and social networking sites are emerging as serious gaming platforms. Casual and mobile gaming is becoming increasingly popular in Western markets. According to Newzoo’s 2013 global games market report, games revenue might grow to $75 billion in 2014, up 7.1% y-o-y, with tablets and smartphones accounting for 21% of total sales.
Though Activision Blizzard's primary target consumer base is hard-core console gamers, the company is making strides towards diversifying into new platforms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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