Activision Faces Competition From Disney Infinity As The Gaming Industry Recovers

August brought mixed news for Activision Blizzard (NASDAQ:ATVI). While research group NPD  reported that retail sales of console and PC games grew 21% through the month, the first positive change in sales since November 2011, ^[1] it also listed Disney Infinity as the third highest selling game during the month behind Electronic Arts’ (NASDAQ:EA) Madden NFL 25 and Deep Silver Volition’s Saints Row IV. According to our analysis, Activision has a market share of nearly 20% in the U.S. video games market ^[2] and positive growth in the industry holds well for the publisher before the highly anticipated launch of the next-generation consoles in November. However, Disney Infinity is a direct competitor to Skylanders, one of Acitivision’s flagship titles.

Our price estimate for Activision Blizzard is $17, in line with the current market price.

See our complete analysis of Activision’s stock here

Skylanders Giants was the best selling console and hand held game in North America and Europe for the first six months of 2013 and the game has generated $1.5 billion in retail sales since its launch in October 2011, accounting for nearly 15% of the company’s sales since. Games in the Skylanders franchise require 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. Disney Infinity follows a similar model, requiring gamers to purchase interactive gaming toys. Combined, the two games accounted for a third of the accessory sales in August, which grew 7%. However, Infinity outsold Skylanders through the month.

We expect the two games to tussle for market share in the coming months, which would be crucial in the coming renewed console cycle. Video game hardware and software sales grew by 60% during the Xbox 360’s first full year in the market while PS3 sales grew by 30%. ^[3] We currently expect Activision’s console sales to grow by nearly 10% in 2014 while the company maintains a double digit growth rate in the PC and Others division through the next few years. However, there is 10% downside to our price estimate should Acitivsion fail to capitalize on the industry revival or the consoles fail to pick up as expected, resulting in growth at a modest 5%.

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1. U.S. Game Sales Show Signs of Turnaround, Wall Street Journal, September 12, 2013 [↩]
2. VGChartz [↩]
3. GameStop Management Discusses Q2 2013 … – Seeking Alpha [↩]