Blockbuster Start For Black Ops III & King Digital Acquisition Drives ATVI Stock To All-Time High

December 15th, 2015 by Trefis Team

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ATVI

Activision Blizzard

Riding on high demand for its Call of Duty: Black Ops III and positive sentiments among the investors regarding the acquisition of King Digital Entertainment, Activision Blizzard’s (NASDAQ: ATVI) stock has jumped more than 15% in the last 30 days after the Q3 earnings release.

Although the highlight for ATVI still remains the acquisition of King Digital Entertainment, the November NPD game sales report, as well as GameStop’s (NYSE:GME) disappointing earnings result, also played a major part in the company’s stock fluctuation. Let us look at what this acquisition holds for the two companies and how the stock reacted to further events.

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Our $37 price estimate for Activision Blizzard’s stock is roughly 4% below the current market price.

See our complete analysis of Activision’s stock here

Growth From King Digital Acquisition

Along with its Q3 earnings results last month, Activision Blizzard announced its deal to acquire King Digital Entertainment (NYSE: KING) for an amount of $5.9 billion in equity value ($5 billion in enterprise value).^[1] King Digital, the makers of the highly popular mobile game: Candy Crush, posted strong Q3 results with gross bookings of $502 million, which is above the higher end of the provided guidance. However, King’s EBITDA margins declined from 41% to 38% in the Q3 2015. Two of the company’s games managed to stay in the top 5 grossing games for 3 consecutive quarters on both the Apple App store and Google Play store in the U.S.^[2]

The cash portion of the transaction will be funded by $3.6 billion of offshore cash on Activision’s balance sheet and the remaining $2.3 billion will be funded by a term loan committed by Bank of America Merrill Lynch and Goldman Sachs Bank USA. The deal is unanimously approved by the board of directors of both companies, as King’s shareholders will receive $18 in cash per share.^[3] The acquisition is expected to be completed by spring 2016.

Soon after the announcement of the deal, KING’s stock jumped 15% from $15.50 to $17.80, whereas ATVI’ stock rose nearly 5% to $37, its then all-time high.

What’s In Store For ATVI?

King Digital is among the leaders in the mobile casual gaming sector, with nearly 474 million monthly active users and some of the widely played mobile games, such as Candy Crush Saga and Candy Crush Soda Saga. Over the past few years, Activision has been focused on expanding its horizon from console games, and this deal comes as a surprise for the investors, as the company tries to tap into the mobile gaming segment. However, with the trend shift towards digital and mobile casual games in the gaming industry, this move might just provide the company with a big platform to serve another huge group of users.

Firstly, Activision will get an opportunity to develop mobile content and cross-sell its products to King’s users. Rather than spending a lot to build a mobile gaming platform over a span of 3-4 years, it was clearly easier and an appropriate move for the company to acquire a mobile gaming company. According to Wedbush estimates, the mobile gaming industry is a $24 billion market, which could grow a further 15-20% annually in the next 5 years.^[4]

Secondly, apart from the incremental revenue boost, Activision’s product and games will get another set of users. However, there is some concern regarding the compatibility of these new users. According to surveys, 60% of the users are females, unlike Activision’s general users who are hardcore gamers with an inclination towards shooter games. Therefore, the addition of King’s mobile games developers to the arsenal will help to continue to create games catering to their known customer base.

Finally, some of the other strong mobile gaming competitors, such as Rovio, the maker of Angry Birds, and Zynga have somewhat faded away after the success of King’s super-hit games. King’s increasing market share in the industry will be a boon to Activision. Moreover, King Digital will further help Activision in reaching the Asian markets. Overall, it’s a blockbuster deal for Activision, at least on paper. The actual impact will be visible towards the end of the fiscal year 2016.

King Digital Couldn’t Ask For More

King’s monthly revenues and user base has been declining for over a few quarters now. In Q3 2015, King’s adjusted revenues declined nearly 9.5% year-over-year (y-o-y) and EBITDA margins declined 300 basis points y-o-y for the quarter. On top of that, its monthly active users fell to 474 million from 495 million a year ago, whereas the daily active users dropped down to 133 million from 137 million. Furthermore, the company’s monthly unique users dropped down to 330 million from a previous 348 million. The only good news for the company was that its non-Candy Crush Saga bookings increased to 60% from 49% a year ago. With stagnant growth, the investors were getting restless, as the stock touched lows of $12 during this year. So a 20% premium over King’s closing price on October 30 was more than welcomed by the company’s shareholders.

Additionally, ATVI’s resources could allow King’s developers to create new innovative content. Activision’s brand appeal might even attract more casual gamers to try out these mobile games.

To stay alive in the industry and keep up with the current trends, it was necessary for the company to make such a move. However, future returns from this deal is still what will keep the investors pleased, or not, as events develop.

Black Ops III Provided The Next Push

The most awaited console game of the year, Call of Duty: Black Ops III was launched on November 6 across all major platforms.^[5] According to the data given by the company, in the first three days, the title managed to surpass $550 million in sell-through worldwide, making it the biggest launch of the year. Moreover, the title recorded more than 75 million hours of game-play online in the first 3 days, making it the title with the highest per player engagement ever recorded for the franchise.^[6]

According to VGChartz, the title has outperformed Advanced Warfare’s four week performance, with more than 12 million unit sales in the first four weeks compared to 10.9 million unit sales of Advanced Warfare last year.^[7]

The impact of console revenues on the company’s valuation can be analyzed below:

November NPD Sales & GameStop’s Dull Quarter Creates Fear Among Investors

According to the NPD sales data, the gamers spent $2.47 billion in November 2015, up 2% y-o-y, with most of the growth coming from the hardware segment. Where on one hand, hardware sales rose 11% y-o-y to $1.12 billion, software sales showed lackluster growth with a 7% y-o-y decline to $994 million.^[8] Black Ops III topped the charts for the month of November, surpassing Fallout 4. With one month left in the year, the net software sales in the U.S. for the 11 month period is down nearly 2.5% y-o-y.

On the other hand, GameStop’s (NYSE:GME) disappointing quarterly result in the third quarter, as well as dull guidance, somewhat tipped off the stocks for the major video game developers. (Read GameStop: A buying opportunity or a stagnant stock?) Electronic Arts, Activision Blizzard, and Take-Two Interactive witnessed declines in the stock price following GameStop’s sluggish result.

Despite mixed emotions among the investors, the company is confident of its performance in the holiday season. Activision’s strong line-up might just prove to be a great weapon for the company in December 2015. Better monthly sales for December and a solid annual result for the company will take the stock past $40 with ease.

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