Activision Faces Stiff Competition From Disney But A Market Recovery And Diablo Will Help Q3 Results

Activision Blizzard (NASDAQ:ATVI) is expected to report earnings for the third quarter of 2013 on Wednesday, November 6. The video game publisher outperformed the video game market through the first half of the year with strong sales of Call of Duty: Black Ops II and the company’s innovative new franchise, Skylanders. The video game market has shown signs of recovery in the last two months, just before the launch of the next generation Sony Playstation 4 and Microsoft (NASDAQ:MSFT) Xbox One consoles.

Research group NPD recently reported a 21% increase in retail sales of console and PC games through August, followed a 27% growth in September. These were the first positive changes in sales since November 2011. ^[1] According to our analysis, Activision has a market share of nearly 20% in the U.S. video games market ^[2] and is likely to benefit from the industry turnaround. However, the company faces increased competition for its flagship franchise, Skylanders from Disney Infinity, which was the third highest selling game in August and ranked seventh in the charts for September. ^[3]

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

See our complete analysis of Activision’s stock here

Tough Competition For Skylanders

Skylanders Giants was the best selling console and handheld game in North America and Europe for the first six months of 2013. The game has generated $1.5 billion in retail sales since its launch in October 2011, accounting for nearly 15% of Activision’s sales. The Skylanders franchise has a unique model that requires  gamers to purchase physical models of the franchise’s characters which have to be placed on the “The Portal of Power” to be accessed on screen. Disney Infinity follows a similar model; the two combined accounted for a third of the accessory sales in August, which increased 7%. Skylanders’ toys sales were up 180% from the prior year in September. However, Disney Infinity has outsold Skylanders through the last few months. The recently released edition of the franchise, Skylanders: Swap Force could help Activision gain back some ground. We will keep a close on the company’s earnings call for any hints about the early performance for the game.

Riding High On Call Of Duty And Diablo

Diablo 3 was the fourth highest-selling game in September, according to NPD data. The company initially released the PC version of the game last year, which went on to sell over 12 million copies worldwide. The recently launched Xbox and Playstation versions of the game have proved to be successful. Another success story for Activision is the Call of Duty franchise, which accounted for 16% of the Xbox 360 and PS3 games sold worldwide last year. In the U.S., Black Ops II accounted for 14% of the Xbox games sold and 18% of the Playstation 3 games, establishing itself as the premier first-person shooter. The latest edition of the franchise, Call of Duty: Ghosts, is expected to launch just before the company announces earnings. We expect the game to build on the momentum generated by its predecessors, allowing the company to transition smoothly into the next generation of consoles which will be launched in the holiday season.

Activision is also working on Destiny, in collaboration with Bungie, the developer of Halo 3. The game has received rave reviews, being described as a mix of Halo and Call of Duty, combining the best elements from both games. ^[4] The game is being developed with an eye on the new consoles and could help Activision maintain its dominance of the video game market in the coming years.

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1. U.S. Game Sales Show Signs of Turnaround, Wall Street Journal, September 12, 2013 [↩]
2. VGChartz [↩]
3. U.S. Video-Game Sales Rise in September on ‘Grand Theft’ [↩]
4. Sony revealed an Activision – Bungie game, ‘Destiny,’ at todays press conference [↩]