Hi Everyone,

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.

Company Description:

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

Activision

Activision segment revenue grew 72% year-over-year, driven by Call of Duty: Black Ops Cold War and Warzone^TM in-game revenues, strong premium sales, and Call of Duty Mobile. Segment operating income more than doubled year-over-year.
The introduction of Call of Duty free-to-play and mobile experiences has transformed the franchise, more than tripling franchise MAUs over the last two years, and leading Activision to a new record of 150 million MAUs in the first quarter.
Call of Duty franchise MAUs increased sequentially and grew over 40% year-over-year in the first quarter.
Call of Duty in-game net bookings on console and PC grew more than 60% year-over-year.
Call of Duty Mobile saw strong year-over-year growth in reach, engagement, and player investment in the first quarter, benefiting from ongoing enhancements in the West and the launch of the title in China. In the West, the March season concluded as the highest for player investment yet. Momentum has continued into the second quarter, with the April season now the top-grossing to date at this point after launch.
The 2021 season of the professional Call of Duty League^TM is off to a great start, enjoying strong year-over-year growth in average minute audience through the first two stages of competition.

Blizzard

Blizzard segment revenue grew 7% year-over-year, led by strong growth in the Warcraft^® franchise. Blizzard had 27 million MAUs in the first quarter.
World of Warcraft’s Shadowlands expansion continued to drive strong results following its record-setting release in November, with first quarter franchise net bookings growing sharply year-over-year.

King

King segment revenue reached a new record, growing 22% year-over-year, driven by strong growth for Candy Crush. King had 258 million MAUs in the first quarter.
King’s initiatives to broaden the payer base, deliver more frequent seasonal events and introduce compelling new features into Candy Crush and other portfolio titles drove in-game net bookings growth in the high-teens percentage year-over-year.
Candy Crush grew in-game net bookings very strongly year-over-year and was once again the top grossing franchise in the U.S. app stores.
In-game net bookings for Farm Heroes^TM, King’s second-largest franchise, also grew sharply year-over-year.
King’s in-game net bookings have remained strong into the second quarter, continuing to grow well year-over-year.
Crash Bandicoot: On The Run!^TM launched on March 25 and has seen over 30 million downloads to-date.
King delivered 70% year-over-year growth in advertising net bookings in the first quarter, with significant increases across both direct brand advertisers and partner networks.

*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

When looking at revenue, we can see that Activision Blizzard has seen growth among all of their subsidiaries. Revenue for Activision grew the most at 72% followed by King with 22% and Blizzard with 7%. The Call of Duty franchise is doing exceptionally well as the segment’s operating income has more than doubled year over year. When comparing Q1 2020 to Q1 2021, we can see that total revenue has jumped by 24% and In-game, subscription, and other revenues jumped by 28%. Expenses have remained relatively stable which shows that much of the growth this company is experiencing is organic. The only number that stands out in terms of expenses is G&A which jumped from $167 to $282 million. Additionally, Net income grew at roughly the same rate as revenue.

In terms of liquidity, this company reported cash and cash equivalents of $9.2 billion which is more than their total liabilities of $8 billion. Thus, Activision has a very strong balance sheet and their current ratio is sitting at 3.43. One thing to note is that their goodwill is high at $9.7 billion, but even if we take out goodwill from their total assets it still surpasses their total liabilities by $5.5 billion. As of March 31, 2021 and December 31, 2020, they had $1.5 billion available under a revolving credit facility (the “Revolver”) pursuant to a credit agreement entered into on October 11, 2013

Activision Blizzard monitors their monthly active users (“MAUs”) very closely and considers them to be a “meaningful performance metric.” This way of measuring their performance is in line with many other gaming companies such as Skillz. When looking at their MAU trend, we can see that it has increased by 6.8% year over year. Although, it’s important to note that the level of growth we’re seeing is largely attributable to Activision as their MAUs have gone from 102 million to 150 million YoY. Blizzard’s and King’s MAUs on the other hand have actually declined by 5 million and 15 million respectively. It’s important that we pay attention to Blizzard’s and King’s MAU trend going forward to make sure that they are performing well. Another thing worth mentioning is that these numbers can change with the launch of new titles but over time they accurately reflect the performance of this company.

Recent Developments/Acquisitions

Diablo II: resurrected is launching this year (February 19, 2021) – Diablo II was said to be “arguably the best role-playing game of all time, the best dungeon-crawler of all time and the best PC game of all time” by Time Magazine. While Blizzard’s performance has lagged that of King and Activision with MAUs dropping and only 7% revenue growth, this title is likely to get the ball rolling once again. J. Allen Brack (President of Blizzard) said, “Diablo II was a pivotal game for Blizzard and millions of players around the world. With Diablo II: Resurrected, we’re excited to bring this classic back to PC and also to consoles—with cross-progression on supported platforms—so that players can relive their memories, or experience Diablo II’s timeless gameplay for the first time, on their platform of choice.” While I no longer play video games, I can attest to the popularity of the Diablo franchise as I used to have a number of friends rave about this game when it was more popular. I hope to see the excitement that the President of Blizzard Entertainment expressed translate into increased revenues and active users for this company.

Crash Bandicoot: On the Run!™ available on mobile platforms (March 25, 2021) – King recently announced that Crash Bandicoot was available as a free-to-play title on iOS and Android mobile devices. Vice President of Game Design at King said, “We’re very excited for players to finally get their hands on Crash Bandicoot: On the Run!… It’s been a labor of love for King to bring everybody’s favorite marsupial to mobile in a way that is unique and fresh, while honoring more than 25 years of rich history with the beloved character. We wanted to make this the Crashiest Crash game ever!” While this title is exciting and certainly a right step in terms of getting the attention of mobile gamers, the reviews told a different story. This title was rated 59% by Metacritic and 6/10 by Pocket Tactics. While I’m somewhat familiar with the series as I played the various titles that were released on the GameCube, It doesn’t seem that gamers are very happy with this launch. On the bright side, this game will certainly attract mobile gamers and is likely to appeal to younger mobile gamers as they try to fight off boredom.

Bilibili signs multi-year deal with Activision to secure exclusive rights to broadcast Overwatch league (April 15, 2021) – Bilibili is a Chinese video sharing site based in Shanghai China. They recently created a multi-year partnership with Activision to acquire the Chinese production and broadcasting rights to the Overwatch League. While Overwatch is certainly popular, the game has seen players turn to other titles as monthly players went from 50 million players in 2018 to 10 million players as of November 2020. Nonetheless, this acquisition by Bilibili points to the fact that Blizzard can make sticky games. The question remains if Blizzard can come out with another sticky title soon that captures the attention of gamers all over the world.

Management

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.

Analyst expectations

Predicted revenue range for 2021: $8.6 – 9.2 billion (growth of roughly 4.5%)
Predicted earnings per share range for 2021 (EPS): $3.68 – 4

Conclusion

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.

Connect with me on Twitter

Twitter: @TedInvests

Things to look into to get a better understanding of this company:

Interviews with the management team
Their financial statements
Their website
Product reviews
Their social media
Their competitors

Sources:

https://www.globenewswire.com/news-release/2021/03/02/2185139/0/en/Cloud-Gaming-Market-Size-Share-to-Rise-at-27-2-CAGR-to-Reach-USD-8-833-Million-By-2027-Facts-Factors.html
https://www.prnewswire.com/news-releases/the-global-video-game-market-is-expected-to-reach-an-estimated-179-1-billion-by-2024-with-a-cagr-of-6-4-from-2019-to-2024–300857007.html
https://www.businessofapps.com/insights/mobile-gaming-industry-statistics-and-trends-for-2021/
https://www.reportlinker.com/p0131217/Video-Games.html
https://www.statista.com/statistics/269667/activision-blizzards-revenue-by-platform/
https://investor.activision.com/static-files/08d2aa4a-9dff-4714-9e17-f3673259c3ce
https://www.businesswire.com/news/home/20210219005510/en/
https://investor.activision.com/news-releases/news-release-details/get-ready-run-lifetime-crash-bandicoottm-unleashed-mobile
https://investor.activision.com/news-releases/news-release-details/blizzard-entertainment-resurrect-diablor-ii-2021-pc-and-consoles
https://afkgaming.com/articles/esports/News/7039-is-overwatch-dying-in-2021-what-is-its-player-count#:~:text=With%20the%20company%20releasing%20a,50%20million%20players%20in%202018.
https://esportsobserver.com/bilibili-broadcasting-rights-owl/
https://www.activisionblizzard.com/leadership
https://www.statista.com/statistics/490522/global-esports-market-revenue/#:~:text=In%202021%2C%20the%20global%20eSports,rapidly%20in%20the%20coming%20years.

Make sure to always do your own research before making any final decisions on buying any call or put options on a stock. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.