Why Blizzard Is Key To Activision Blizzard’s Future Growth

by Trefis Team
Activision Blizzard
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Activision Blizzard (NASDAQ:ATVI) needs its Blizzard unit to keep up the momentum it has seen in recent quarters. This is especially important considering that the Activision unit’s user base growth has slowed down in the last two years. In contrast, Blizzard is doing exceptionally well, with Overwatch and a roster of strong gaming titles. Therefore, a lot of market value is hinged on the expectation that Blizzard’s user base will continue to grow impressively. Take a look at our interactive breakdown of Activision Blizzard’s  business which shows how Activision Blizzard needs its Blizzard unit to keep churning out great games.

Our price estimate for Activision Blizzard stands at $66, which is in line with the current market price.

Blizzard’s Growth Is Critical As Activision’s User Base Growth Has Slowed Down

While we expect Activision Blizzard’s overall revenue to grow at a CAGR of 7.9% during the next 5 years, we estimate that the revenue of its Blizzard arm will see nearly 15% annual growth. This growth will primarily be driven by a sharp increase in Blizzard’s monthly active users. In contrast, Activision’s user base growth has slowed down significantly in the last two years, and we expect that to continue. We expect the revenue contribution of Blizzard to the company’s overall revenue to increase from 40% to 56% in the next 5 years. In essence, Blizzard’s expected growth is a big part of Activision Blizzard’s value.

Around 33% Of Activision Blizzard’s Value Is Tied To The Growth In Blizzard’s User Base

Our price estimate of $66 for Activision Blizzard is based on the expectation that Blizzard’s monthly active users will increase from an estimated 40 million in 2017 to nearly 77 million in 2022. If this figure were to remain at current levels, it would imply a valuation of $44, a 33% downside to our price estimate. With a long term EBITDA margin of nearly 60%-65%, and long term revenue per user of around $70-75, a reduction of 1 million in Blizzard’s monthly active users would imply a $45 million reduction in EBITDA. In a flat growth scenario, our 2022 forecast for Blizzard’s monthly active users falls by 30 million, implying an EBITDA reduction of $1.35 billion, or 25% of our forecast figure for that year. The figure amplifies as we venture further out.

To Maintain User Base Growth, Blizzard Needs New Titles And Expansions

The recent surge in Blizzard’s monthly active users can be attributed largely to Overwatch‘s success. However, in order to keep the user base growth up in the long run, Blizzard must continue to introduce expansion packs for its current lineup as well as invest in and launch new games. This is especially important considering that its most successful game, World of Warcraft, is near the end of its lifecycle

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