Activision Blizzard: King Digital’s Future Growth Is Dependent On Its New Game Launches

Activision Blizzard’s (NASDAQ:ATVI) King Digital accounts for more than 15% of the company’s value, according to our estimates. The segment primarily includes casual games, such as Candy Crush, Farm Heroes, and Bubble Witch. King Digital has seen a decline in its monthly active user base while it has managed to grow its average revenue per user in the recent past. We expect this trend to continue in the near term. The overall segment revenues will likely see modest growth in 2018, partly aided by higher advertising revenues. We have created an interactive dashboard highlighting the company’s King Digital business. You can adjust revenue drivers and margins for 2018 and 2019 to see how it impacts the company’s overall revenues, earnings, and price estimate. Below we discuss our expectations and forecasts for the segment.

King Digital Will Likely See No Significant Revenue Growth In The Near Term

King Digital’s revenues have increased over the last couple of years, due to a solid growth in average revenue per user. However, the average monthly active user base has declined from over 493 million in 2015 to 310 million in 2017. It was even lower at 285 million by the end of Q1 2018. This can primarily be attributed to the maturity of titles, and lack of any major new titles. Also, there is stiff competition in mobile gaming, both from the established players as well as independent developers. That said, the segment revenues grew around 12% in Q1 2018, led by the Candy Crush franchise, which even after years of launch continues to one of the best grossers. In fact, it held number one and number two grossing mobile spots in the U.S. over the last two quarters. But, in order to expand the user base, the company needs new titles. The company’s management in the recent quarterly earnings conference call stated that King Digital will launch new games later in the year, and it is to be seen how that will impact the user base. Looking at the average revenue per active user metric, we expect a low single digit growth in 2018, and beyond. This can be attributed to the company’s efforts of advertising in its gaming platforms. We currently forecast a modest segment revenue growth in 2018, aided by advertising revenues. Overall, we believe that King Digital’s future growth can largely be linked to its new launches, as the existing titles have matured.

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