Impact Of World Of Warcraft’s End On ATVI Stock

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

After the release of the eighth generation consoles in 2013, the gaming industry witnessed strong performance in 2014 in the hardware segment. Both the new console systems, Microsoft’s Xbox one and Sony’s PlayStation 4, were immediately popular among the gamers. According to NPD’s gaming data, in 2014, gamers spent over $5.1 billion on hardware in U.S. retail stores, up 18% year-over-year (y-o-y). However, the absence of any AAA title in the first half of the calendar year led to 13% y-o-y decline in  software sales in 2014.

Activision Blizzard (NASDAQ: ATVI), the leader in the shooter games genre, had a good year, with its stock (ATVI) trading between $18 and $24 during the entire year. The company managed to deliver record earnings per share of $1.42 for the whole year, up more than 50% from the previous year. Impressive financial performance in the first nine months of 2014 resulted in a double digit (nearly 11%) revenue growth for the whole fiscal year, as the company reported $4.8 billion in net revenues. [1] The reason for strong revenue figures was the release of more innovative content in titles. Activision released new versions of some of its popular franchises, such as Call of Duty: Advanced Warfare, Diablo III, and Skylanders TRAP TEAM, as well as some new path-breaking franchises, such as Destiny and Hearthstone: Heroes of Warcraft. The company’s core franchises maintained their dominance in their respective genres. Activision’s two new franchises: Destiny and Hearthstone attracted over 40 million gamers combined, generating a net $850 million in non-GAAP revenues.

Our $21 price estimate for Activision Blizzard’s stock is nearly $2 below the current market price.

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See our complete analysis of Activision’s stock here

Trefis’ estimate for the ATVI stock is slightly below the current market price. Now taking the company’s plans and guidance, as well as probable future scenarios in mind, there is a scenario that can impact the company’s stock price.

  • Can This Be The End Of “World of Warcraft”?

One of the major sources of revenue for Activision  has been its widely popular Massively Multiplayer Online Role-Playing Game (MMORPG), World of Warcraft (WOW). The franchise has long been a cash cow for Activision accounting for close to $0.9 billion in annual revenues. But the popularity of the game has waned since it reached a peak of nearly 12 million subscribers in 2010. Since then, the subscriber base of the franchise has been declining. After the release of the third expansion pack ‘Cataclysm’ in December 2010, several free-to-play online MMORPGs like Aion: Ascension, Vindictus, and Allods Online entered the fray. Moreover, the desperate release of the fourth expansion pack ‘Mists of Pandaria’ in September 2012, also failed to revive the interest of gamers. As a result, the number of WoW subscribers dropped to 6.8 million by June 2014, due to strong competition from these free-to-play online MMORPGs. [2]

Even though, the latter half of 2014 witnessed some improvement, with the subscriber count reaching 10 million in November, after the release of the fifth expansion pack, the overall future scenario of this franchise looks blurred. [3] The jump in subscriber base does not completely ensure the resurgence of the franchise, as the first day sales of all the previous expansion packs witnessed a similar short-term spike.

With other free-to-play online games in the market, declining interest of the gamers in this franchise, and increasing gamer count in other genres, such as shooting games and sports games, Trefis estimates the franchise to survive the decade, with the customer count reaching below 8 million by the end of our forecast period.  However, if the franchise is washed out  earlier than anticipated, we might see a faster decline in the subscriber base. There are even speculations that the franchise might shutdown in the next 5-6 years. Blizzard’s lead game designer Tom Chilton accepted that there are chances that the franchise might not grow. [4]

In this scenario, if we assume that the subscriber base comes down to zero by the end of 2021, we might see a 15% decline in the price estimate of ATVI. This scenario is highly debatable, yet highly possible with the current gaming scenario, where free-to-play games have taken over the industry by storm.

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Notes:
  1. Activision Blizzard Q4 2014 earnings call transcript []
  2. WoW down to 6.8 million subscribers []
  3. World of Warcraft surpasses 10 million subscribers as Warlords of Draenor launch begins []
  4. Is the end nigh for World of Warcraft? []