Activision Blizzard (NASDAQ:ATVI) is the largest video game publisher in the U.S. Its Call of Duty series has been one of the most popular games since the Call of Duty: Finest Hour released back in 2004, with over 22 million units sold worldwide in 2011.  Increased expenses due to an aggressive marketing campaign to promote the latest expansion in the World of Warcraft (WoW) franchise, Mists of Pandaria, have affected the company’s bottom-line so far this year leading the stock to a downward spiral. The game itself proved to be quite successful, selling 2.7 million copies on the first day of release. 
We believe the market is undervaluing the company. Our price estimate for Activision Blizzard is $18, around 60% above the current market price. Below are a few key trends that have influenced our valuation.
Although 2.7 million is an impressive sales figure, it is a significant decline from the record set by the previous expansion in the WoW series, Cataclysm, which sold 3.3 million units in the first 24 hours. This decline is a big disappointment for the world’s biggest massively multi-player online role-playing game (MMORPG) franchise which has had youngsters hooked on to their computers since its first came out in 2004.
The franchise was successfully able to attract subscribers, reaching a peak of nearly 12 million in 2010. It has since rapidly lost market share to Riot Game’s League of Shadows, which was launched in 2009 and has successfully accrued customers at an incredible rate of nearly 1 million per month, surpassing 30 million subscribers. 
Despite the loss in market share, the series is still a big bread winner for Activision as the company does not rely much on the sales of the product, but rather on longevity as it earns monthly revenues through a subscription-based model. The company has already announced the successor for the Wow series, Titan, which is scheduled for release in 2014 and will follow the same subscription model. Banking on the company’s reputation and the quality of products it has delivered so far, we maintain an optimistic outlook for the franchise, expecting it to boost sales and subscriptions on its release.
Call To Arms
Call of Duty was the most popular game of 2011, selling 12 million units on X-Box 360 and 10 million on PS3. This year too, the game is among the top-ten best selling games. Activision has done a great job of capitalizing on the franchise’s popularity by releasing a new edition each year.
In addition to unit sales, the company also earns revenues by offering premium online membership called Call of Duty Elite, at $50 per year, although the online game play is free. There are currently around 2 million subscribers with access to new maps and game modes through this membership.
The next installment of the series, Call of Duty: Black Ops 2, is scheduled for release in November and has garnered great fanfare, exceeding its predecessors pre-orders by over 30% on Amazon (NASDAQ:AMZN).  We believe the monetization strategy regarding this franchise and the overwhelming popularity of the game holds Activision in good stead for the next few years.
Money Falling From The Sky?
Last year, Activision launched Skylander: Spyro’s Adventure, a role playing game (RPG) targeting a younger audience. Apart from earning revenues through unit sales, the company also manufactures and sells physical models of the franchise’s characters. These models have to be bought separately and placed on an interactive platform “The Portal of Power” for the user to access the character. The model has been a huge success with the honor of being the best-selling console and handheld video game since its release and was also the biggest source of revenues for the company last quarter.  The next game in the franchise, Skylanders Giants, is expected to release this October and is greatly anticipated by the series’ fans.
Activision has also released the game on Amazon’s Kindle Fire HD, refer to our article Activision Targets Tablet Gaming Boom With Hit Games For The New Kindle Fire HD for more details. With innovative marketing and monetization strategies such as the one employed for Skylander, we expect steady growth in Activision’s PC and other platforms revenue.Notes:
- Global Yearly Chart, VGChartz [↩]
- Mists Of Pandaria sales highlight World Of Warcraft’s decline, Digital Trends, 4th October, 2012 [↩]
- With StarCraft II Declining, The World’s Top PC Game League Of Legends Sees Continued Growth, Forbes, 14th September, 2012 [↩]
- Call of Duty: Black Ops 2 Pre-orders on Amazon Already Beating Black Ops, MW3, The Inquisitor, 3rd May, 2012 [↩]
- SKYLANDERS SPYRO’S ADVENTURE WAS TOP SELLING CONSOLE GAME, Gaming Industry News [↩]