Despite regularly outperforming the market expectations over the past few quarters, video gaming giant Activision Blizzard’s (NASDAQ:ATVI) stock has declined by over 10% since the beginning of January 2012. We believe the reason behind this decline is more to do with the overall dismal scenario in the video-gaming industry, rather than any specific concerns for Activision. Below we look at the factors that supports our $17.81 price estimate for Activision Blizzard, which is at a premium of over 50% to the current market price.
Activision to benefit from changing gaming landscape
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The video gaming landscape is swiftly changing from retail to digital. Digital gaming is the most important focus area for gaming publishers including Activision Blizzard. While the company’s MMO gaming division is already digital, Activision Blizzard is taking impressive strides in other areas as well. Digitally downloadable content (DLC) in the form of map packs and full digital PC game downloads are contributing handsomely to the company’s revenue growth. The progress of Activision in the digital business can be gauged by the fact that its digital revenues increased by 14% in 2011, which is almost double the growth rate of its total net revenues in 2011.
However, the more significant impact of the changing gaming landscape has been on the company’s margins. Fueled by a changing product mix, Activision’s gross margins climbed by a staggering 7 percentage points to reach 71% in 2011. With the digital business continuing to enjoy the focus of video-gaming industry, we expect the trend to carry forward.
Additionally, the changing dynamics of the gaming industry has provided Activision Blizzard an opportunity in digital distribution as well. Digital distribution is a highly lucrative market for publishers such as Activision because apart from reaching its customers directly, the company is also shunting middle-man retailers such as GameStop (NYSE:GME), thus improving its margins further.
Strong prospects in WoW: Mists of Pandaria and Call of Duty: Black Ops 2
Activision Blizzard’s highly anticipated World of Warcraft: Mists of Pandaria was launched on September 25th. During the first week of launch, the expansion has already sold through approximately 2.7 million copies and the game’s global player base passed 10 million subscribers, with growth across all major regions. With the recent launch in China on October 2nd, we expect the increasing trend in the number of WoW subscriptions to continue. The online subscription business contributes roughly 26% to the Trefis price estimate for Activision Blizzard’s stock.
In addition to the strong initial reception of Mists of Pandaria, we’re also optimistic on Activision’s upcoming Call of Duty sequel Black Ops 2. The game has already started featuring in the discussions on leading gaming forums. Considering the heightened anticipation levels and the reputation of Call of Duty games in the first person shooting genre, we expect Call of Duty: Black Ops 2 to be a major contributor for Activision in 2012.
Solid pipeline of video games going ahead
An impressive pipeline of games for the remaining half of 2012 and 2013 is also one of the reasons behind our bullish view on Activision Blizzard. In addition to the new franchise games that include Call of Duty Black Ops 2 and Skylanders: Giants, Activision Blizzard’s pipeline consists of video games such as Call of Duty Online for China, StarCraft II: Heart of the Swarm, Blizzard All-Stars and their all-new MMORPG currently known by the code name Titan. Call of Duty in particular holds strong prospects for the company as China is currently the biggest gaming market in the world. The online game market in China is estimated at $8 billion, and is expected to grow at a 17% compounded annual growth rate through 2016.