Activision Blizzard (ATVI) Investment Memo

Meera Equities 12.1.2020

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Investment Thesis

As gaming continues to become more popular and expand with younger generations, Activision has proven it can produce some of the most popular games for years to come.

Company Description

Activision Blizzard was formed in 2008 by the merger of Activision, one of the largest console video game publishers, and Blizzard, one of the largest PC video game publishers. The combined firm remains one of the world's largest video game publishers. Activision's franchise portfolio includes World of Warcraft, Call of Duty, and Overwatch.

Qualitative

Overview

• Sector: Communication Services

• Industry: Electronic Gaming & Multimedia

• Competitors: Electronic Arts, Take-Two Entertainment

Strategy: Life-Time Value in Gaming  

• Overwatch was released in 2015, and World of Warcraft was released in 2004.

  • Both titles have not released a second-generation copy of the game.

• World of Warcraft has an estimated 4.4 million players in 2020, and Overwatch has reportedly had 50 million players in 2020.

• Activision Blizzard also owns the Call of Duty series which are released each year.

  • These games are released by two separate developers, which produces concurrent games to be different with new features and playability.

Business Model: Recurring Revenue: Always Improving/Releasing

• Activision Blizzard has produced 6 titles that have generated $1 billion in revenue. This revenue includes the purchase price of the physical game and in-game purchases.

  • They strive to only produce the top tier content that their fans expect.

  • Therefore, their year over year revenue growth rates have not looked positive, they are essentially only producing one new game per year (Call of Duty).

• Once a game is released, they will have add-ons or expansion packs to expand a player’s gaming experience.

• When pairing these digital transactions with a long life cycle with

• World of Warcraft has been living for 15 years and Overwatch was released 5 years ago. When consumers know how long these life cycles are, it is easier for them to stomach an extra $15-$20 per year for extra content.

Market: All Platform Connectivity

• Activision Blizzard’s games are playable between Xbox, PlayStation, PC, and mobile gaming.

• This is their differentiator, they have a near-even split between consoles (Xbox, PlayStation) and PC gaming, with mobile gaming revenues on the rise. Their competitors are primarily on consoles or PC.

• Most of their games are rated M (mature, +17) so that eliminates some market, but their long life cycle allows time for the younger customers to reach the minimum age to begin playing.

Moat: High Levels of Profitability   

• They have hit home runs on nearly every game they have produced.

• This has caused their historical margins to skyrocket:

  • Gross Profit -> 76%

  • Profit Margin -> 30%

  • Free Cash Flow -> 29%

• This is not only a great thing for investors, but for gamers as well.

  • These high margins allow them to invest more in their games and produce similarly long life-cycles with multiple avenues to produce in-game revenue.

X-Factor: Mobile Gaming

• In a recent report, Activision said they will bring all their franchise games to mobile devices.

• This is because of their 2019 smash hit “Call of Duty: Mobile” the free to play game has received 300 million downloads.

• While it is free to play, you do not receive all game features and are operating under a freemium model.

• Their acquisition of Candy Crush developer “King” in 2016 shows this move to mobile has been in the process for years.

• Across all titles, they have a total of 390 million monthly active users. Pairing new mobile functionality should continue their reach.

Cash Cow: New Games  

• The only large game that is regularly produced is their Call of Duty franchise.

• In the next year there are planning on releasing the new World of Warcraft (last released 16 years ago), and a new Overwatch game (the last release was 5 years ago).

• In 2017, World of Warcraft reportedly grossed $9.2 billion, and Overwatch reportedly grossed over $1 billion.

  • These numbers are 3 years dated, so it is safe to assume those numbers have increased.

• Their new Call of Duty, released two weeks ago, recorded a digital sales record across platforms.

• There is no sales data yet, but their previous title recorded $645 million on the game sale, which does not include in-game purchases.

Growth Opportunities: eSports

• They bought Major League Gaming “MLG” for $46 million at the beginning of 2016.

• MLG is a broadcaster and parent organization to a majority of all US eSporting events.

• MLG can stream and host tournaments for any game, it does not have to be an Activision Blizzard title, creating a larger viewer market.

• Global eSports revenue has been grown to $1.1BB, up 15.7% from last year, and is expected to grow at a CAGR of 15% until 2023.

  • While there are several players in the eSports market, MLG is the dominant player in North America.

Quantitative

Risks

• Activision’s model of pouring money into its successful brands could produce severe risk if one of their title’s flop.

• Their World of Warcraft user base has been in steady decline, making the WoW 2 release especially important as it has been one of their longest projects.

• With the new releases of WoW and Overwatch within the next year, this stock could be subject to speculation on how gamers will react to the game.

• Yearly Call of Duty releases could become old for consumers and produce lower sales.

Learn Something

• New Game Releases: https://www.fool.com/investing/2020/02/04/3-drivers-for-activision-blizzards-growth-strategy.aspx

• Mobile Gaming Launch: https://www.androidauthority.com/activision-blizzard-mobile-games-1174109/

• eSports Surging: https://www.marketwatch.com/press-release/esports-market-industry-analysis-and-forecast-2018-2025--by-product-type-formulation-and-regioncagr-of-20-2020-11-26?tesla=y#:~:text=With%20the%20proliferation%20of%20smartphones,more%20interactive%20and%20streaming%20based.

Disclaimer: Meera Capital is not a registered investment, legal or tax advisor, or a broker/dealer. This article reflects the opinions of Meera Capital, this analysis is the basis for informational purposes only. The author of this article may have an interest in the security that is being discussed. Meera Capital encourages all readers to do their own research. This article was written with the intent of providing readers a basis to form their own opinion after reading our thorough analysis.