Expect Call of Duty Franchise To Drive Activision Blizzard’s Near Term Growth

Activision Blizzard (NASDAQ:ATVI) recently reported its Q3 earnings, which were more or less in line with our estimates. However, the company continued to see a decline in its user base, and this led to a sharp decline in the stock price following the earnings release. Looking forward, we continue to believe that Q4 will be a very strong quarter for the company, benefiting from the release of Call of Duty: Black Ops 4, which is seeing good user engagement. Also, Q4 will benefit from the World of Warcraft: Battle of Azeroth. King might also see growth in Q4, led by its recent release of Candy Crush Friends Saga. We have created an interactive dashboard ~ What Is The Near Term Outlook For Activision Blizzard ~ on the company’s expected performance in Q4. You can adjust various drivers to see the impact on the company’s overall earnings, and price estimate.

Expect Activision & Blizzard Segments To See Strong Growth In The Near Term

We forecast Activision revenues to see strong growth in the near term, but for the full year revenues will likely see a low single digit decline, led by lower average monthly active users (MAUs). The near term growth can be attributed to the Call of Duty: Black Ops 4, which was released last month, and garnered $500 million in worldwide sales in the first three days of its launch. Also, the user engagement has been better than its previous releases in the recent years, according to the company’s management. If the user engagement remains strong, the franchise will boost the segment top line growth over the next couple of quarters.

Looking at the Blizzard segment, the monthly active user base remained lower at 37 million in Q3. However, we forecast a jump in MAUs in Q4, which should benefit from World of Warcraft: Battle of Azeroth, released in Q3 this year. The game sold over 3 million units on the first day of its release. We forecast a high single digit growth in the segment revenues for the full year, as a decline in average MAUs will be more than offset by growth in average revenue per MAU. Also, the segment should benefit from its World of Warcraft expansion in 2019, which includes World of Warcraft Classic to be available as part of the franchise subscription.

King Will Likely See Continued Decline In MAUs

King Digital is seeing a decline in the monthly active users in the recent quarters, and we expect this trend to continue in the near term. However, we forecast the segment revenues to be up in mid-single digits for the full year, led by expansion of its live services, which are aiding the average revenue per MAU. The segment’s near term growth will also be dependent on its new launch of Candy Crush Friends Saga. It will be interesting to see the user engagement for King in the near term, given it has seen massive decline in the recent years. However, the company has still managed to grow its revenues, primarily from offering in-game purchases, and advertising. We expect this trend to continue in the near term, and the growth in average revenue per active user for King to offset most of the revenue declines arising from lower MAUs.

Our Price Estimate of $64 For Activision Blizzard

Overall, we believe that Call of Duty: Black Ops 4 will be the key growth driver for Activision Blizzard in the near term. We currently estimate the company’s overall revenues to be a little under $7.30 billion, of which 34% can be attributed to Activision, 32% to Blizzard, and King & Others making up for the rest. We forecast the adjusted EPS to be $2.54 in 2018, and with a TTM price to earnings multiple of 25x to arrive at our price estimate of $64 for Activision Blizzard. This implies a premium of over 15% to the current market price.

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