Why We Revised Our Price Estimate For Activision

Gaming giant Activision Blizzard (NYSE:ATVI) continues to perform well in 2017, following its strong performance in 2016. The company has beaten market expectations for both revenue and EPS seven of the last eight quarters and has consistently been churning out hit games. In fiscal 2016, the company posted revenues of $6.61 billion, 42% higher than the prior year, and EPS of $1.28, a 7% increase over 2015. The company’s strong performance has positively impacted the investor sentiment and has resulted in its stock trading around $59, near its all time high and almost 50% higher than last year.

Given the strength in Activision Blizzard’s recent quarterly results and a robust outlook for future quarters, we have revised our price estimate for the company’s stock to $60, which is slightly ahead of the current market price. Moreover, we have revised our model structure and have broken down the divisions as follows: Activision, Blizzard, King and Other/Distribution. Here are the key factors that support our current stance for the company:

Strong Blizzard Portfolio

Per Trefis estimates, Blizzard accounts for over 60% of the company’s value, primarily due to a few factors. Historically, Blizzard’s strong franchises – including World of Warcraft – have been the main source of revenue for the company. Of late, newer games and digital packs from Blizzard’s stable have continually increased the segment’s monthly active users (MAU) from 19.3 million in 2014 to 36 million in 2016. We expect this trend to continue in the near future, and drive value for the division.

In addition to World of Warcraft, Overwatch has been a stellar success for the company. With more than 30 million registered users, Overwatch has become Blizzard’s fastest growing franchise. The company has plans to launch an e-sports league for Overwatch, along with launches of digital packs, which should ensure that the franchise’s popularity doesn’t slow down. This continued popularity bodes well for the company going forward.

Tapping Mobile Audience

Activision’s acquisition of King Digital, completed in 2016, marked the company’s major foray into the domain of mobile gaming. King Digital brings a strong portfolio of games such as Candy Crush, and more than 400 million MAUs. However, King Digital’s active users have declined from almost 500 million in 2014 to around 400 million in 2016, largely due to the more casual nature of mobile gaming. To counter the fall in MAUs and ensure greater engagement on the mobile platform, the company plans to utilize King Digital’s expertise to launch mobile versions of its most popular franchises such as Call of Duty, which should help open up new sources of revenue growth. Additionally, the company plans to generate advertising revenue from its mobile users, which should augment King Digital’s growth.

With mobile gaming’s revenues forecast to reach almost $65 billion by 2020, the company is well positioned to leverage the growth in this segment.

Focus On User Engagement Through Digital Packs

Through digital packs and content updates, Activision Blizzard has been able to increase the shelf life of its existing games, which has helped the company post higher revenues and increased margins, as digital content has fewer related costs given the lack of a physical product. This is evident from the fact that Activision’s subscription revenues have increased as a proportion of the company’s revenues, from 37% in 2014 to 67% in 2016. With a relatively light schedule of new launches in the near future, the company has plans to launch regular digital packs for its existing games, which should provide a boost to the top line and margins.

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