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Investment Overview for Activision Blizzard (NYSE:ATVI)
WHAT HAS CHANGED?
Activision is set with new game launches
Looking ahead, Activision appears well settled for the near term, thanks to its strong portfolio of globally famous games. The launch of “World of Warcraft’s” expansion, “Legion,” was a big success. “Overwatch” appears to be just getting started and it is going to garner incremental popularity because it touches upon competitive play/e-sports, a domain that has drawn a lot of attention. World of Warcraft appears to have ran its course but the new expansion should provide a significant near term increase in subscribers. Additionally, Activision’s growth will get a lift from the launch of a new adventure for "Hearthstone," an expansion of the “Destiny” universe, a new game entitled “Skylanders: Imaginators,” and the highly anticipated “Call of Duty: Infinite Warfare."
Next Generation Consoles
- Next Generation Console Revenues: Next Generation consoles include Microsoft's Xbox One, Sony's PS4, and Nintendo's Wii U. Nintendo Wii U was released in November 2012, whereas the PS4 and Xbox One were released in November 2013.
Next Gen. Console Revenues has been taken as zero for the years before 2012. However, the company's revenues from Next generation consoles were $16 million in 2012, due to only a few games released on Wii U. The revenues increased to $92 million in 2013, due to games only on Wii U and on other platforms for just two months (November and December). The revenues from next generation consoles took a big leap in 2014, as the figure jumped to $720 million, due to the success of core titles on these famous platforms. The jump was significant in 2015, as well, with revenues touching $900 million. We expect the next generation console revenues to rise steeply over the next three years, and touch $2 billion by the end of 2017. The aggressive growth is based on the strength of Call of Duty and Destiny franchise. Thereafter, we expect the revenue growth to slow down and reach $2.7 billion by the end of our forecast period (2022). If the company comes up with more FPS titles in the coming years, and they perform fairly well, we might witness the revenues touching $3 billion by the end of our forecast period, and this might lead to a 12% upside to the Trefis price estimate.
On the other hand, if the company's core FPS franchises fail to attract the core gamers and the revenue rises to just $2 billion by the end of our forecast period, there could be a 8% downside to the Trefis price estimate.
Mobile and Other Platforms
- Mobile and other platform Revenues: We currently expect revenues from mobile and other platforms to increase steeply over the next five years, and to reach $3.2 billion by the end of our forecast period. The aggressive growth is based on the company's acquisition of King Digital and increasing focus on mobile games and other social and casual games on handheld devices. If Activision Blizzard fails to attract casual gamers with its casual and social games, and the revenue just reaches $2 billion by the end of our forecast period, there could be 11% downside to the Trefis price estimate. On the other hand, if the company manages to release more mobile games and other casual games for handheld devices, and the revenue from this segment touches $4 billion by the end of our forecast period, there could a 6% upside to our price estimate.
Activision Blizzard is a worldwide online, PC, console, handheld, and mobile games publisher.
Activision develops and publishes video games on various consoles, handheld platforms, and the PC platform, through internally developed franchises and license agreements. Activision currently offers games that operate on the Sony's PS3 and PS4, Nintendo Wii and Wii U, Microsoft's Xbox 360 and Xbox One console systems, Nintendo DS, Nintendo 3DS and Sony PlayStation Vita handheld devices, the PC, Apple iPhone, iPad, and other mobile devices.
Blizzard is the leader in terms of subscriber base and revenues generated in the subscription based massively multiplayer online role-playing game (MMORPG) category. Blizzard internally develops and publishes PC-based computer games and maintains its proprietary online game related service, Battle.net.
Its distribution business consists of operations in Europe that provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software as well as its own publishing operations and manufacture of interactive entertainment hardware.
Call of Duty
Call of Duty is widely regarded as the all-time highest selling third-party gaming franchise in dollar terms. All three of its last editions -- Call of Duty: Black Ops, Call of Duty: Modern Warfare 3, and Call of Duty: Ghosts -- have surpassed the sales records created by their predecessors. The company released the new edition of the franchise: Call of Duty Advanced Warfare in November 2015. Call of Duty has been the most successful franchise in Activision’s history with a total of over 250 million units sold to date. It leads the FPS genre by a wide margin. Moreover, Call of Duty Online is one of the biggest online gaming communities in the world, with a huge gamer base and interactive interface.
World of Warcraft
World of Warcraft (WoW) is officially the most played MMORPG throughout the world with a subscriber base surpassing 10 million members. WoW is sometimes referred as the money minting machine for Activision Blizzard as margins in the MMORPG business are in the range of 80-85%, the highest among all divisions. However, the company has been witnessing a decline in the subscriber base of the franchise, due to strong competition from other free-to-play online MMORPGs in the market. The latest expansion, Legion, has been quite successful in bringing subscribers back, and this should help the game retain players until the next expansion comes.
Decreasing demand for previous generation consoles
Both the next generation consoles, the X-Box One- and the PlayStation 4, are just 18 months old, and the demand for these new consoles is still strong. However, the demand for the previous generation consoles has decreased since the start of the calender year 2015. According to NPD, gamers spent nearly $446 million on hardware in the summers of 2016, down 14% year-over-year (y-o-y).
Gaming industry's changing landscape from retail to digital
The video gaming industry has been changing from retail towards digital. This is evident by the fact that a growing number of games are being published digitally. Casual browser-based gaming and mobile gaming have become a significant part of gaming revenues and are expected to continue to perform well in the future.
Activision Blizzard has also changed its strategy to focus its sales through a mix of retail and digital gaming products. The DLC (DownLoadable Content) map packs for Call of Duty: Advanced Warfare have performed exceedingly well and the trend is expected to continue.
Emerging new platforms such as smartphones, tablets, and social networking sites
The increasing digitization of the video gaming industry has ensured that video games won't stay limited to consoles and handhelds, rather that smartphones, tablets, and social networking sites are emerging as serious gaming platforms. Casual and mobile gaming is becoming increasingly popular in Western markets. According to Newzoo’s global games market report, games revenue might grow to $103 billion in 2017, with a compound annual growth rate of 8.1%
. Though Activision Blizzard's primary target consumer base is hard-core console gamers, the company is making strides towards diversifying into new platforms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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