Activision Blizzard New Coverage: $17.50 Trefis Price Estimate

by Trefis Team
Activision Blizzard
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Activision Blizzard (NASDAQ:ATVI) is a worldwide online, PC, console, handheld, and mobile games publisher. While its subsidiary Activision is the market leader in first/third person shooting games with its highly successful “Call of Duty” franchise, Blizzard Entertainment is a very dominant player in the MMORPG (massively multiplayer online role playing game) space with its “World of Warcraft“. Activision Blizzard’s portfolio of games also includes other popular gaming franchises such as StarCraft, Diablo and those based on popular movie licenses such as Spider-Man, X-Men, James Bond and Transformers. The company generates nearly 54% of its revenues from video game sales in the U.S. and another 38-42% of its revenues from video game sales in Europe, and Activision Blizzard competes with other game developers like Electronic Arts (NASDAQ:EA), Take-Two Interactive Software (NASDAQ:TTWO) and casual gaming mainstays such as Zynga (NASDAQ:ZNGA) etc.

We have a $17.58 price estimate for Activision Blizzard, which is roughly 50% above its current market price.

Launch of Coverage on Activision Blizzard | $17.58  Price Estimate

We have broken down our analysis of Activision Blizzard platform wise, along the following divisions:

  1. Consoles:
    (Subdivided into Microsoft Consoles; Sony Consoles; Nintendo Consoles)
  2. World of Warcraft & Other MMORPG
  3. PC & Other Platforms
  4. Distribution
  5. Handhelds

Key Value Drivers

Call of Duty and World of Warcraft

Call of Duty is widely regarded as the all time highest selling third-party gaming franchise in dollar terms. All of its recent three versions, Call of Duty: Modern Warfare 2, Call of Duty: Black Ops and Call of Duty: Modern Warfare 3 have been blockbusters, with the latest Call of Duty: Modern Warfare 3 already surpassing $1 billion sales in just a month since its release. Call of Duty is a major contributor to both Microsoft console revenues and Sony console revenues.

World of Warcraft (WoW) is officially the most played MMORPG throughout the world with a subscriber base surpassing 10 million+ members. With the high gross margins included in MMORPG genre, WoW is a money minting machine for Activision Blizzard.

The significance of Call of Duty and WoW for Activision Blizzard can be gauged by the fact that in 2010 both games contributed roughly 62% to the company’s revenues and a significantly higher percentage of its operating income.

Digital Centric Business Strategy

On account of the shift in trends for the video game industry from retail to digital, digital revenues have gained in importance for Activision Blizzard. While MMO gaming is already purely digital, Activision Blizzard is taking impressive strides in other arenas too. Digitally downloadable content (DLC) in the form of map packs and full digital PC games downloads are contributing handsomely to company’s revenue growth. 

Call of Duty: Elite

Call of Duty: Elite,  is a multiplayer gaming service for Call of Duty: Black Ops and Call of Duty: Modern Warfare 3, launched in November 2011. While the service is till now limited to Xbox 360 and PS3 members only, Activision plans to launch it for PC also going ahead. We have considered the revenues from Call of Duty: Elite individually according to the platform. For instance Call of Duty: Elite revenues from XBox 360 members will be a part of Microsoft Console Revenues.

The multiplayer service has had a phenomenal response with Call of Duty as Elite attracted over 1 million members within first week of its release. Activision Blizzard also plans to develop it as a digital distribution platform just like its PC counterpart Taking cues from the initial results and its prospects in the future, we believe it can be a big contributor to Activision Blizzard’s value going forward.

Threat to World of Warcraft

Though still the biggest MMORPG by a wide margin, the World of Warcraft is increasingly being threatened by the emergence of free to play and other competing subscription based MMOs.

The latest and most credible is the threat from rival EA’s Star Wars: The Old Republic (SWTOR) which many critics believe may derail World of Warcraft, owing to aging of WoW and SWTOR’s technical superiority over WoW. World of  Warcraft contributes roughly 28% to Activision Blizzard’s stock price according to Trefis price estimate, and a decline in WoW revenues can have a big impact on Activision Blizzard’s stock price.

Understand How a Company’s Products Impact its Stock Price at Trefis

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