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While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery.
Activision Blizzard along with other gaming companies benefited in the Covid-19 crisis, as the demand for gaming gained traction, given that more people are confined to their homes, eschewing more public forms of entertainment.
Even before the crisis, Activision Blizzard was doing well with its stock up 25% in 2019, led by continued demand for the Call of Duty franchise. In the current environment, it is likely that the company will continue to generate more sales, boding well for its stock.
Also, ATVI stock has seen a decline of over 15% over the recent past. In fact, ATVI stock saw a 6% decline in a single trading session on Tuesday, July 27. The decline came in after the company is being sued for a hostile work environment. Furthermore, the company’s initial response to the allegations angered its employees and hundreds of them staged a walkout. How this impacts the company’s performance is yet to be seen, but surely this development didn’t bode well with the investors.
Blizzard EBITDA Margin: Blizzard EBITDA margin stood at about 41% in 2020. We expect margins for the division to increase (to 45%) over the Trefis forecast, driven by higher revenues, sales of digital packs and strong performances of the segment's new launches. If margins were to improve to historical highs of around 55% over our forecast period, there could be a potential upside of around 5% to our price estimate. This is possible with new game launches, and increased monthly active users.
On the other hand, if the stiff price competition from other gaming companies puts pressure on margins, with the figure declining to under 35% mark, then there could be a potential downside of about 5% to Trefis price estimate for Activision Blizzard's stock.
Activision's Monthly Active Users: Activision's Monthly Active Users increased from an estimated 40.7 million in 2014 to 116.5 million in 2020, primarily due to higher engagement of users in existing franchises and longer shelf life of games. The popularity of the Call of Duty franchise, and the success of new age consoles helped boost the metric over the past few years. However, as the market comes to reach its saturation point, and the number declines to under 80 million by the end of the Trefis forecast period, as opposed to our current forecast of around 160 million, there could be a potential downside of over 20% to Trefis price estimate for Activision Blizzard's stock. However, if the metric continues to grow, and reaches over 200 million active users, we could see a potential upside of 10%.
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 is widely regarded as the all-time highest selling third-party gaming franchise in dollar terms. Call of Duty has been the most successful franchise in Activision’s history with a total of over 400 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. The franchise helps generate a lot of revenues for the company.
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 very high. 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.
Activision Blizzard has benefited in the current crisis, as the demand for gaming could see traction, given that more people are confined to their homes, eschewing more public forms of entertainment. Even in Q1 2021, the company posted segment revenue growth of a solid 27%. While the segment revenues declined in Q2 owing to a tough comparison, the overall user engagement levels for gaming is still higher than the pre-pandemic levels.
Both of the next generation consoles, the X-Box Series X and the PlayStation 5, were launched in 2020 holiday season, and they saw a strong demand. With growth in demand for new consoles, the software demand is also expected to rise.
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 and subsequent launches of digital packs for individual games, which help increase its shelf life. 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.
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, mobile games revenue are expected to grow in double digits in the near term. Though Activision Blizzard's primary target consumer base is hard-core console gamers, the company is making strides toward diversifying into new platforms.