I orginally made this research report on my blog (http://tedinvests.com/posts/) and I'm now posting it on Utradea. I encourage you to read the post on my blog as it provides more graphs and pictures so you can get a better idea of this company.
Activision Blizzard, Inc. is a global entertainment holding company that develops and publishes entertainment content and software. Activision is the combination of Activision Publishing Inc., Blizzard Entertainment Inc., and King Digital Entertainment. This company develops and distributes content across various gaming platforms including consoles, PC, and mobile devices. Activision conducts business through three segments; content distributed via digital online channels, retail channels, and other channels. Some of the most popular franchises by Activision Blizzard include Call of Duty, Diablo, World of Warcraft, Candy Crush, and more. In addition to generating revenue from their full-game and in-game sales, they also generate revenue from their eSports Leagues and selling digital advertising. Their eSports Leagues are based around their Call Of Duty, Overwatch, and other video game franchises. In pursuit of growth, they focus on three strategies: expanding audience reach, deepening consumer engagement, and increasing player investments.
Note – I will refer to this companies subsidieries as ‘Activision’, ‘Blizzard’, and ‘King’
For more than a year now, amid very challenging conditions, the teams at Activision Blizzard have played an important role in supporting and serving our community of 400 million players in 190 countries. Our teams have kept players connected using our platform to comfort, inspire and draw people together. Their hard work and dedication enabled us to deliver significantly better-than-expected first-quarter results. – Bobby Kotick (CEO)
Total Addressable Market (TAM)
The gaming market can be segmented into mobile, console, and PC games. Mobile games account for 51% of global revenue in the gaming industry, while console and PC account for 25% and 24% respectively. Currently there are 2.7 billion gamers globally. The global gaming market reached a value of $167.9 billion in 2020 and is expected to reach $287.1 billion by 2026, representing a CAGR of 9.24% during the period. Most recently, the trend in augmented reality (AR) and virtual reality are greatly impacting the rate of growth in this industry. For reference, the augmented reality and virtual reality market is expected to reach $45.2 billion by 2027, representing a CAGR of 31.8% during the period. Looking at a different segment, in 2020 the global market for cloud gaming was estimated at $1.3 billion and is projected to reach $6.9 billion by 2027. That growth represents a CAGR of 27.4% over a 7 year period.
The mobile gaming market is the largest within the whole video game market and was valued at $77.2 billion in 2020. This industry recorded a 12% increase in the number of players in 2020 reaching a total of 2.5 billion players. While there are many mobile gamers, reports have come out that show that only 38% of players will pay for games. The fastest growing genre within this market is casual games like Candy Crush which is made by King Digital Entertainment. A common trend within this industry is in-game ads. These in-game ads are key to monetizing the various games and there are several ways of integrating them into mobile games. The most popular way is by having users periodically watch ads in order to play the games for free. On the other hand, developers could choose to have users pay for the game and have them not have to worry about being interrupted by ads. According to one source, 82% of mobile gamers prefer free games with ads to paid mobile games without. Nonetheless, Activision’s revenues within the mobile gaming industry are likely to see steady growth as King continues to innovate. The chart below gives us an idea of where the trend is at and where it could be heading in the future.
Fourth Quarter and Full Year 2020 Financial Results
*Net bookings is an operating metric that is defined as the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others, and is equal to net revenues excluding the impact from deferrals.
*In-game net bookings primarily includes the net amount of downloadable content and microtransactions sold during the period, and is equal to in-game net revenues excluding the impact from deferrals.
*MAUs are a key measure of the overall size of Activision’s user base. MAUs are the number of individuals who accessed a particular game in a given month.
Important Points to Address
Rather than look at the CEO, CFO, etc. of this company I wanted to take a deeper dive into the Presidents of Activision, Blizzard Entertainment, and King.
President, Activision – Rob Kostich
Rob is the President of Activision and has been with the company for more than 16 years and served in a number of roles since 2004. Prior to his current role, Rob served as the general Manager and Executive Vice President of Activision. Under his management, Call of Duty has scaled rapidly and is now played by millions internationally. In addition, Rob has led successful franchises such as James Bond, Transformers, Tony Hawk, and Marvel Comics. He also began the Call of Duty esports program which began with the Call of Duty World League. Prior to him joining Activision, he held various marketing roles at Verisign, Nestlé USA, and The Clorox Company.
President, Blizzard – J. Allen Brack
J. joined Blizzard in January 2006 and has held multiple positions at the company prior to being named president in 2018. While he’s been with Blizzard, he served as the executive producer for World of Warcraft (#1 MMORPG in the world). Under his leadership he sought to make sure that every aspect of development and operations ran perfect before the World of Warcraft launch. J. has also led all the philanthropic activities associated with World of Warcraft which resulted in Blizzard’s donation of millions of dollars for causes such as disaster relief and children’s healthcare. J. been in the gaming industry for 24 years and has help multiple roles at Origin Systems, inc. and Sony Online Entertainment LLC.
President, King – Human Sakhnini
Human served as the Chief Financial Officer and Chief Strategy Officer between 2016 and 2019 before being named President of King. Human has been with Activision for more than 10 years and led the successful acquisition of King in 2016 for $5.9 billion. Prior to his role at Activision, Human was a Partner at McKinsey & Company where he spent 8 years helping them set their growth strategy and specializing in media and entertainment. He has also worked for the likes of ISGroup, Nesbitt Burns, and the Department of Finance in Canada.
What could go wrong
Blizzard fails to innovate – While this point may seem obvious, it’s important to note because Blizzard’s revenue only grew by 7% YoY and MAUs decreased by 5 million YoY. What we have to look forward to is the launch of Diablo II: resurrected which should help propel both revenue and MAUs higher as the Diablo franchise is one of the most successful video game franchises ever. Although, perhaps this relaunch will disappoint in terms of revenue and user growth and investors should be skeptical until the numbers officially come out. The game franchises that are currently helping this subsidiary grow are World of Warcraft, Starcraft, Overwatch, Hearthstone, Diablo, and a few others. While Blizzard is mainly focused on releasing expansions for their current game lineup, investors likely want to see a new game title being announced in the next year or two.
MAUs decrease as we get past Covid – Certainly one of the biggest things near-term hindering this company’s growth is the fact that Covid is starting to become a thing of the past. While as of right now many people are working remote and somewhat stuck at home, as summer approaches closer people will want to go out and spend less time playing games. As we’ve seen in the past, the monthly active users trend for this company hasn’t exactly gone up consistently over the years but rather tends to fluctuate with the launch of new games and a variety of other factors. Additionally, this company is up against some heavy competition such as EA, Epic Games, Ubisoft, Zynga, Nintendo, etc. Let’s hope Activision can continue to innovate and capture the attention of gamers.
What we want to see in the future
I didn’t feel as if it was necessary to write in-depth about how we need to see more innovation coming from this company and especially Blizzard.
Esports picks up – As shown by the graph below, Activision has a huge opportunity to grow in terms of their esports leagues. In 2020 the esports market was valued at slightly over $1.08 billion and is expected to reach over $1.6 billion by 2024. Activision currently operates a number of leagues such as the Overwatch League, the Call of Duty League, Hearthstone Grandmasters, and the World of Warcraft Arena World Championship, among others. When looking at Activision’s most recent 10-Q filing, we can see that they brought in $126 million from their Overwatch and Call of Duty League. However, when reporting this stream of revenue they list it in a line item titled “other” which also includes revenues from their distribution business. Thus, we don’t have exact numbers for this revenue stream but we get a rough estimate. It’s also important to note that esports revenue for 2021 was far lower than the $646 million they reported in 2020. We can expect that in 2021 their revenue numbers will increase and contribute nicely to their bottom line.
Activision Blizzard is a leading global publisher and developer of interactive entertainment content and services. They’ve managed to really stand out due to some of their hugely successful titles such as World of Warcraft, Call of Duty, Overwatch, etc. While some of their growth rates for certain segments have slowed down, I remain optimistic that this trend will reverse. Investors argue that Activision’s Call of Duty franchise is where much of this business’s growth comes from, and that’s one of my biggest concerns. Nonetheless, I remain bullish on this company for the long-term and would consider starting a position if it were to fall under $90. Under $80 is where I would begin to add aggressively. My DCF model, which I believe to be conservative, gave me an intrinsic value of $136.07 for this business which represents a roughly 43% upside.
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