While Sony and Microsoft (NASDAQ:MSFT) battled over the next generation of video game consoles, Activision Blizzard (NASDAQ:ATVI) was one of the stand out participants at the recently concluded Electronic Entertainment Expo (E3). The company’s gaming portfolio at the expo consisted of just four games: Call of Duty: Ghosts, Skylanders: Swapforce, Destiny, and Diablo 3.  But the developer’s presentation made it clear that it is ready for the console transition about to take place later this year.
Our price estimate for Activision’s stock is $15, implying a premium of 10% to the current market price.
Last year, more than 80% of Activision’s $4.8 billion revenues came from just four games: Call of Duty, Diablo, Skylanders and World of Warcraft. These four titles allowed Activision to capture 17% of the global video game market share (in terms of units sold) in 2012,  allowing it to beat an industry-wide decline in sales induced by console fatigue.
The company maintained an 18% market share in the U.S.  Activision reported a 2% year-on-year increase in revenues for 2012 with a 25% year-on-year increase in revenues for the crucial holiday season. In contrast, video game sales for the entire industry plunged 22% during the holiday period. 
Results were buoyed by Call of Duty: Black Ops II, which was the highest selling game, worldwide. The game alone accounted for 11% of game sales worldwide and in the U.S. The Call of Duty franchise has been phenomenally successful with each of the last five editions of the first person shooter (FPS) making the list of top ten selling games U.S. and worldwide. Activision has an agreement with Microsoft to launch the next edition of Call of Duty, entitled CoD: Ghosts on the Xbox platform before releasing the Playstation version. The game generated much fanfare at the E3  and will allow Activision to make a smooth transition to the Xbox One.
The last FPS to beat Call of Duty on the game charts was Halo 3, back in 2007. Acitivision has worked in collaboration with Bungie, the developers of Halo 3, to come up with Destiny. The game was unveiled for the Playstation platform at E3 and received rave reviews, being described as a mix of Halo and Call of Duty, combining the best elements from both games.  We expect the game to do well and possibly take on the mantel from Call of Duty in the coming years.
Diablo III was also a big success last year with over 12 million copies sold worldwide. The game was originally released just for personal computers and went on to become the fastest-selling PC game of all time. Activision is now bringing the game to the consoles with both present generation and next generation releases. We expect a steady increase in Playstation revenues in the coming years.
Skylanders To Help Revenues
The innovative Skaylanders franchise generated revenues in excess of $1 billion from its launch in 2011 to the end of 2012. The franchise not only generates income through unit sales but also requires gamers to purchase physical models of the franchise’s characters that have to be placed on the “The Portal of Power” for the user to access the character. Toy sales generated revenues of $100 million in the first year of launch. The game is primarily intended for the younger generation of gamers and the next edition of the games, Skylanders: Swapforce impressed at the E3 stage.
However, the franchise will face stiff competition from Disney’s Infinity video game, which is being developed along similar lines and will also incorporate the company’s popular characters from franchises like the Incredibles, Monsters. Inc and Pirates Of The Caribbean.Notes: