Lockdown Can Help Activision Blizzard’s 2020 Sales Top $7 Billion?

Activision Blizzard’s stock is outperforming the broader markets, as it could see high single-digit y-o-y sales growth in 2020 (vs a 13% decline in 2019), amid the current coronavirus crisis. The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. Between January 31 and April 6, Activision Blizzard’s stock gained 5%, marking a significant outperformance compared to the broader S&P 500, which fell by over 17% over the same period. Activision Blizzard stands to benefit in the current crisis, as the demand for gaming could see traction, given that more people are confined to their homes, eschewing more public forms of entertainment.

Even before the crisis, Activision Blizzard was doing well with its stock up 25% in 2019, led by continued demand for the Call of Duty franchise. In fact, the company confirmed that the latest game in the Call of Duty franchise, Call of Duty: Modern Warfare, generated sales of over $1 billion as of mid-December 2019. As of February 2020 (the latest available report), the game continued to be the top selling game in 2020 as well. In the current environment, it is likely that the game will continue to generate more sales. 

Note that Activision Blizzard’s 2019 sales were down 13% y-o-y, due to poor performance of the Blizzard segment. There was no release of World of Warcraft game, and the user engagement for other Blizzard games, including Earthstone and Overwatch, declined. Apart from an expected increase in overall gaming demand, the success of Call of Duty, and more planned games slated for release in 2020, including the expansion of World of Warcraft, will likely drive Activision Blizzard’s revenues past $7 billion. We detail the company’s revenue drivers in our analysis on ATVI Revenues: How Does Activision Blizzard Make Money?, parts of which are highlighted below.

Activision Blizzard’s Total Revenue Has Declined 2% Between 2016 And 2019

• Activision Blizzard’s total revenues grew from $6.6 billion in 2016 to $7.5 billion in 2018, but declined sharply to $6.5 billion in 2019.
• This represents an average annual decline rate of -0.1%. The decline in revenues in 2019 can be attributed to the absence of any World of Warcraft title for the Blizzard segment.
• We forecast the revenues to grow 17% to $7.6 billion in 2021.

Comparing Activision Blizzard’s Sales To Its Peers

• Activision Blizzard’s total revenue declined from $6.6 billion in 2016 to $6.5 billion in 2019.
• Activision Blizzard’s total sales have been higher than its peers Electronic Arts and Zynga.
• Electronic Arts total sales grew from $4.4 billion to $5.0 billion between fiscal 2016 and fiscal 2019.
• Zynga’s sales grew sharply from $0.7 billion to $1.3 billion over the same period.

Activision Sales Have Been Steady Over the $2 Billion Mark

• Activision segment sales grew slightly from $2.2 billion in 2016 to $2.3 billion in 2019. While the segment sales have remained steady, the segment monthly active users (MAUs) and average revenue per user (ARPU) has fluctuated.
• MAUs grew from 50.0 million in 2016 to 60.5 million in 2019, while ARPU declined from $44.50 to $37.30 over the same period.
• The growth in MAUs, primarily in 2019, can be attributed to the Q4 release of Call of Duty: Modern Warfare, which has seen strong sales. In fact, the segment MAUs grew 3x between Q3 2019 and Q4 2019.
• We forecast MAUs to continue to grow, led by continued success of Call of Duty: Modern Warfare, especially in the current environment. Activision Blizzard stands to benefit in the current coronavirus crisis, as the demand for gaming could see traction, given that more people are confined to their homes, forgoing more public forms of entertainment.
• ARPU decline in 2019 can be attributed to the impact of Destiny publishing rights being sold in 2018, on the segment revenues.

After Declining In 2019, Blizzard Sales Could Pick Up

• Blizzard segment sales declined from $2.4 billion in 2016 to $1.7 billion in 2019.
• This was led by a decline in both MAUs and ARPU. MAUs declined from 36.0 million in 2016 to 32.3 million in 2019, while ARPU declined from $67.8 to $52.8 over the same period.
• The decline in MAUs and ARPU, primarily in 2019, can be attributed to lower engagement for Earthstone and Overwatch, and the absence of any World of Warcraft title.
• We forecast the segment sales to grow in 2020, as the company has stated that it plans to launch next expansion for World of Warcraft soon. In general, the company stands to benefit in the current coronavirus crisis, as the demand for gaming could see traction, given that more people are confined to their homes, eschewing more public forms of entertainment.

King Continues To See Decline In MAUs

• King segment has seen steady revenue growth from $1.6 billion in 2016 to $2.1 billion in 2019.
• This was led by higher ARPU, partly offset by continued decline in MAUs. King MAUs declined from 405 million in 2016 to 257 million in 2019, while ARPU grew from $3.90 to $8.00 over the same period.
• The decline in MAUs can primarily be attributed to absence of any major new games. The segment has been relying on the Candy Crush franchise for growth over the past few years.
• ARPU growth over the recent years is being led by more in-game offerings and advertising.
• We forecast the segment sales to grow in the near term, led by growth in MAUs as well as ARPU. The company plans to launch new titles, which could aid its user base. Also, with more spare time in the current crisis, user engagement could increase.

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