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Activision Blizzard: C-19 lockdown boosts video gaming

  • Activision Blizzard (ATVI) is a leading global video game publisher, with several hundreds of titles in its library, including Call of Duty, Warcraft, StarCraft, Diablo, Overwatch, and Candy Crush Saga.
  • Due to popularity of the franchise, Activision Blizzard has delivered robust financial performance. Notably, the company released strong financial results for Q1 2020 even though the global Covid-19 crisis held sway during that period.
  • Most of Activision Blizzard employees are currently working from home, posing certain workflow challenges. Nonetheless, the management has pledged to release all games on schedule this year.
  • We are upbeat about the steps taken by Activision Blizzard to boost its mobile gaming business and expand its footprint in the promising and rapidly growing cybersport segment.
  • As part of a recently announced restructuring plan, Activision Blizzard is focusing on business lines that the management believes hold the most growth potential, while cutting funds for projects that fell short of expectations. Thanks to cost-cutting efforts, the company continued to deliver solid profitability.
  • Activision Blizzard stock has performed well in terms of technical analysis.

We assign a Buy recommendation to Activision Blizzard shares in the medium term, with a target price of USD 82.

Company profile

Activision Blizzard (ATVI) is a leading global video game publisher, with a library consisting of several hundred titles, including many popular games such as Call of Duty, Warcraft, StarCraft, Diablo, Skylanders, and Overwatch. Activision Blizzard took over Ireland-based mobile game developer King Digital Entertainment several years ago, adding more than 200 games to its portfolio, including Candy Crush Saga and Candy Crush Soda Saga, which rank among the top Five highest grossing mobile games in the US. With over 400 mn monthly active users (MAUs), Activision Blizzard currently has a market capitalization of slightly over USD 56 bn.

Financial performance

Given the popularity of the franchise, Activision Blizzard has delivered robust financial performance in recent years. Notably, the company showed strong financials for Q1 2020 even though the global Covid-19 crisis held sway during that period. With millions of people under lockdown across the globe, the amount of time spent playing video games skyrocketed.

Adjusted revenue surged 21% y-o-y to USD 1.52 bn, outperforming the management’s guidance of USD 1.275 bn and the consensus forecast of USD 1.32 bn. Digital sales accounted for over 80% of total revenue. Growth was driven by the strong performance of Call of Duty: Modern Warfare, a shooter game released last fall, which is now the best-selling title in 2020 year-to-date, according to a report from the NPD Group. Modern Warfare, in turn, contributed to the highly successful March launch of Call of Duty: Warzone, a free-to-play 150-person battle royale extension, which has already recorded over 60 mn players, the company said. The last quarter turned out to be fairly good for Activision Blizzard’s other popular franchises such as Overwatch, World of Warcraft and Candy Crush. As a result, adjusted EBITDA spiked 85.9%, to USD 569 mn, while adjusted earnings per share shot up 87.1%, to $0.58, strongly outperforming the $0.38 consensus forecast. The number of monthly active users reached 407 mn in Q1 2020.

Activision Blizzard has a strong balance sheet, which is a key advantage in the coronavirus-stricken market environment. The company reported a cash position of USD 5.91 bn at end Q1 2020, with long-term debt standing at USD 2.68 bn. Activision Blizzard generated USD 129 mn in operating cash flow last quarter, of which USD 19 mn was used to finance capex. Moreover, the company paid out full-year dividends of $0.41 per share (up 11% y-o-y).

Given its stellar financial performance last quarter, Activision Blizzard’s management revised full-year 2020 revenue guidance to USD 6.9 bn, up from an earlier USD 6.725 bn, while adjusted EPS guidance was raised to USD 2.60 compared to USD 2.35. As regards Q2 2020, the company expects to earn $0.65 per share and generate USD 1.675 bn in revenue for the quarter.

Growth factors

In our view, Activision Blizzard’s prospects remain promising. Even though bars, restaurants and parks have gradually begun to re-open in some countries, it is premature to talk about the complete elimination of restrictions imposed to contain the coronavirus. Specifically, over the next few months there will almost certainly not be any major concerts or public events, so consumers will still have to stay at home more than usual, so they will continue to play video games, one of the few entertainment options for spending decent leisure time. We think that Activision Blizzard as a major gaming industry player stands a good chance of capitalizing on the current situation.

Most of Activision Blizzard employees are currently working from home, posing certain workflow challenges. However, the management has pledged to release all games on schedule this year. Specifically, during the second half of the year we expect the company to come out with World of Warcraft – Shadowlands, a sequel to Call of Duty. Over the next few weeks, the company should release the new content for World of Warcraft Classic. In addition, the company said it is working on remastering and reconceptualizing a number of its games that will be released this year. Activision Blizzard plans to continue expansion into the mobile segment. The testing of Diablo Immortal, a mobile version of the famous franchise, should get under way before long.

The company announced Overwatch 2, the sequel to its team shooter Overwatch, at the traditional BlizzCon conference last November. The game will feature co-op story missions, replayable hero missions, and new multiplayer options. Furthermore, the company announced the development of Diablo 4. Fans of the game welcomed a trailer and first gameplay shots of the long-awaited Diablo sequel. These two games are tentatively slated for release in 2021-2022.

The management of Activision Blizzard also pins great hopes on further rollout of the eSports industry. The company has done its utmost to popularize cyber sports and take them to a new stage of development by turning them into entertainment available to the widest possible audience. Another season (the third one) of the cyber sports league, Overwatch League, began in February and it is currently running 100% online. In addition, in late April Activision Blizzard in tandem with Sony Mobile announced an eSports event, Call of Duty: Mobile World Championship 2020 Tournament, with a prize pool of USD 1 mn. Open online qualifiers will be held until May 24, after which stage two of the tournament will start and more details will be revealed at a later time. The only thing that is known so far is that the tournament will be team-based.

We note that Activision Blizzard’s restructuring plan announced in 2019, according to which the company will focus on business lines that the management believes hold the most growth potential, while cutting funds for projects that fell short of expectations, is starting to pay off. To remind, apart from the decision not to go ahead with Destiny, Activision Blizzard’s cost-containment efforts called for a headcount reduction of about 800, or 8% of the total workforce. Meanwhile, the number of programmers involved in the development of such leading franchises as Call of Duty, Candy Crush, Overwatch, Warcraft, Hearthstone and Diablo, increased by 20%. Moreover, the company remains committed to reducing operating costs not related to the development of games and to streamlining its administrative segment.

Below is our forecast for the company’s headline financial results over the next few years.

Comparative multiples

As regards EV/EBITDA and P/E projections for 2020, Activision Blizzard looks overall cheaper than its international peers and is on par for 2021 EV/EBITDA and P/E forecasts. Given Activision Blizzard’s industry leadership position, its high returns, strong balance sheet and good prospects, we think the company is attractively valued on financial multiples.

Technical analysis

From a technical standpoint, the daily chart shows that Activision Blizzard has broken out of a local rising channel to the upside. We expect the stock to extend its ascent towards the next target of USD 80.00.

$ATVI, Activision Blizzard, Inc / H1

In our view, Activision Blizzard is an interesting mid-term investment. Our target price is USD 82.00.

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