Activision Blizzard: Expect E-Sports And Call of Duty To Drive Activision’s Near Term Growth

by Trefis Team
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Activision Blizzard
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Activision Blizzard’s (NASDAQ:ATVI) Activision segment accounts for more than 30% of the company’s value, according to our estimates. The segment primarily includes console games, such as Call of Duty, Destiny, and Skylanders. The games can be played on next generation platforms such as Microsoft’s Xbox One, Sony’s PlayStation 4, and Nintendo Wii, among others. The segment revenues have declined from over $3 billion in 2013 to $2.6 billion in 2017. This can be attributed to lower average revenue per active user. However, we expect the revenues to grow in the coming years, led by a strong lineup of games, primarily Call of Duty. We have created an interactive dashboard ~ A Quick Snapshot of Activision Blizzard’s Activision Segment. You can adjust revenue and margin drivers 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.

Expect Steady Growth In User Base And Average Revenue Per User In The Coming Years

Activision revenues are dependent on two factors – 1) Average No. of Monthly Active Users, and 2) Average Revenue Per Active User. Average No. of Monthly Active Users have increased from 40.7 million in 2014 to 49.8 million in 2017, primarily due to higher engagement of users in existing franchises and longer shelf life of games. We expect this metric to increase marginally over the long run as we forecast the engagement levels to trend upwards over the platform in the coming years. We forecast the metric to be north of 51 million by the end of our forecast period. However, the Average Revenue Per Active User has declined from $60.5 in 2014 to $51.8 in 2017. This can be attributed to an underwhelming performance of some of Activision’s franchises. We forecast a low single digit growth in the metric over the coming years, primarily led by a solid lineup of games, as well as the ramp up in e-sports. Call of Duty: World War II, which was released in November 2017, is expected to provide a boost to the segment’s Average Revenue Per Active User.  Further in October 2018, Call of Duty Black Ops 4 is expected to be released, which will aid growth in 2019. In the long run, we anticipate new launches and regular content updates to keep the users engaged for a longer duration, thereby increasing the segment’s Average Revenue Per Active User. Additionally, the launch of the company’s Major League Gaming for its highly popular Call of Duty franchise provided a unique platform for gamers to connect. With the company’s plan to strengthen its e-sports segment, we anticipate a larger audience for the company.

Expect Activision EBITDA Margin To Grow Marginally In The Coming Years

Looking at the segment EBITDA, it accounted for roughly 40% of the company’s overall EBITDA in 2017. However, we expect the contribution to decline in the coming years, as Blizzard segment EBITDA is expected to rise at a much higher pace (Also See – Why Blizzard Accounts For Over 50% Of Activision Blizzard’s Value). Activision EBITDA Margin increased from 42% in 2014 to over 50% in 2017, driven by higher revenues, sales of digital packs and strong performances of Call of Duty. We expect margins to improve slightly from the current level for the rest of our forecast period. Longer game life cycles will aid the margins. With the launch of digital packs, the shelf life of console games has steadily been increasing. In order to ensure freshness in game content, the company launches regular updates of the existing games, which are essentially an extension of the game. The uptick in revenues from digital packs ensures greater profitability for the company and the franchise, since the costs related to the manufacturing of digital content are lower in comparison to new games. Having said that, Activision faces significant competition both on a domestic as well as an international level. Competitors such has Electronic Arts have seen strong growth in the past, which has ensured strong competitive positions among the companies. Increasing competition will likely keep a lid on Activision’s EBITDA margin, and any significant growth is unlikely.

Also, look at other metrics related to Activision Blizzard, such as Activision Blizzard’s Activision Monthly Active Users Historical Trend And ForecastActivision Blizzard’s Activision Average Revenue Per Active User Historical Trend And ForecastActivision Blizzard’s Blizzard Average Monthly Active Users Historical Trend And ForecastActivision Blizzard’s Blizzard Average Revenue Per Active User Historical Trend And ForecastActivision Blizzard’s King Digital Average Monthly Active Users Historical Trend And ForecastActivision Blizzard’s King Digital Average Revenue Per Active User Historical Trend And Forecast here

 

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