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Activision Blizzard (ATVI) Stock | NASDAQ: ATVI

Franchises with Staying Power

Activision Blizzard is a video game company based out of Santa Monica, California. The company was formed in 2008 by the merger of Activision, one of the largest console video game publishers, and Blizzard, one of largest PC video game publishers. The combined firm remains one of the world's largest video game publishers.

Activision Blizzard’s main goal is to connect and engage the world through "epic" entertainment. Being in the video game industry for over 40 years, Activision Blizzard has brought forth some of the most popular household franchises, such as Call of Duty, Overwatch, World of Warcraft, and Candy Crush.

Activision's Call of Duty ("CoD") has been the most successful console gaming franchise of all time. The CoD franchise continues to flex staying power year after year.

Growth

34

Valuation

84

Quality

58
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Where Are We Now

Updated on: 11/6/2021

Conviction Score

5

Activision Blizzard is the producer of the world’s most popular games, like Call of Duty and Candy Crush. Against all odds, these franchises have entertained recreational players and gamers alike since the 2000s. However, we think the company’s recent internal affairs have been rattling investors and customers.

  • We currently think Activision Blizzard’s “relevance” in the gaming world may be at risk. Game delays, harassment allegations, and players buying games from other video game publishers leave tons of uncertainty for the future of the company.

  • The release of two highly anticipated games – Overwatch 2 and Diablo IV – may place Activision back on track if they are well-received by players.

Investment Thesis

  1. Activision Blizzard is a video game publisher with some of the most valuable intellectual property ("IP") in the industry. Its well-known game franchises have consistently produced impressive results, notably Call of Duty which has been the best selling console game in its release year nine of the past 12 years busting the “FPS-fatigue” theory and proving the franchise continues to have dominant staying power.

  2. The business is growing its mobile gaming segment through acquisitions and publishing famous game titles on mobile. Mobile gaming remains the industry’s fastest-growing segment globally.

  3. Activision Blizzard has handled the industry’s changing landscape extremely well with the shift to free to play content with in-game purchases, also known as micro-transactions ("MTX"). Micro-transactions now make up well over half of the company’s revenue.

  4. The business continues to grow Monthly Active Users ("MAU[s]") at an impressive clip across its game franchises with the free-to-play model while increasing average revenue per user ("ARPU") through creative monetization and in-game currencies.

  5. Activision Blizzard has a promising set of game release dates in the next few years to keep content fresh and exciting for years to come while continuing to expand the player base.

The Basics

Activision Blizzard is a development and publishing company all about providing epic gaming and entertainment experiences. The company has created some of the world's most well-known video game franchises in the world and strives to empower hardcore gamers and recreational thrill-seekers alike.

The company is upheld by three important strategic pillars that guide its innovative process, new game releases, and market competitiveness in the right direction:

  • Expand audience reach

  • Drive deep consumer engagement

  • Increase player investment

Its brand is split up into 3 different segments, each of which includes many notable franchises:

  1. Activision Publishing: the world famous Call of Duty franchise

  2. Blizzard Entertainment: Overwatch, Diablo, World of Warcraft, and Hearthstone

  3. King Digital Entertainment: Candy Crush, Farm Heroes, and Pet Rescue

Besides these three segments, Activision Blizzard runs a several recognizable independent studios — Infinity Ward, Treyarch, Sledgehammer Games, Toys for Bob, and Vicarious Bob.

Activision Blizzard FranchisesSource: India Today Gaming

Activision Blizzard's world-class franchise line-up came to be through a combination of in-house research and development and opportunistic acquisitions, namely Blizzard and King.

While Activision historically focused on console games, it broke into PC and mobile gaming with its merger with Vivendi Games, which Blizzard was a part of, and acquisition of King Digital.

These moves all aligned with Activision Blizzard's three strategic pillars. Today, the company generates its revenue mainly in equal parts from Console, PC, and Mobile players. Activision Blizzard is a true cross-platform gaming and entertainment provider to an audience of over 400 million monthly active users ("MAU[s]").

By hosting a network of hundreds of millions of players and releasing entertaining games with a depth of content, Activision Blizzard also can (and does) deepen engagement by enabling social connections within its franchise communities.

Finally, with vast audience reach and deep consumer engagement, the floodgates to increasing player investment — a key growth opportunity — are opened. As players increasingly engage with its content, Activision Blizzard reasons that these players are more likely to purchase another game from the company or other in-game content and features. The effects of these three strategic pillars are explored later in this report.

Activision Blizzard Revenue by Channel (Q3 2021)

Source: Activision Blizzard Investor Relations

Activision Blizzard Revenue by Platform (Q3 2021)

Source: Activision Blizzard Investor Relations

Activision Monthly Active Users (M) (Q3 2021)

Source: Activision Blizzard Investor Relations

Financial Overview

Activision is a gaming and content powerhouse, delivering consistent revenue growth at mouthwatering operating margins. The company boasts high operating margins despite the heavy research and development investments year in, year out to produce the best new content, the best new game, and the most exciting new experiences for players.

Despite persistent news headlines about franchise fatigue (especially in reference to CoD), Activision Blizzard continues to find new ways to monetize players and grow revenues.

Activision Blizzard Revenue ($M) (Q3 2021)

Activision Blizzard Revenue by Source (Q3 2021)

Source: Activision Blizzard Investor Relations

However, the company does a lot more than just "sell games". In addition to purchasing games and subscriptions, players can engage further with their favourite franchises by purchasing in-game content.

Players can also "invest" by purchasing merchandise, products, and engage in the company's esports leagues and events.

On the other side, businesses can leverage Activision Blizzard's massive multi-hundred-million player base to advertise on certain franchises, particularly on mobile.

If there is one takeaway we want to leave you with, it's this: Activision Blizzard is early in its journey of incrementally monetizing its player base. If successful, the company will unleash powerful revenue growth opportunities at higher margins than it delivers today.

From Atari to Activision

In the year 1976, four developers, David Crane, Larry Kaplan, Alan Miller, and Bob Whitehead worked for a popular video game company, Atari. Despite developing some of the highest grossing games on the market at the time, none of the developers were recognized or compensated for their efforts. For that reason, along with the poor management staff and conflicting environment, the group of four decided to leave Atari and start their own company. In came the beginning of Activision.

At the time, there were no third-party video game developers. All companies that made consoles targeted a dedicated sector to create games for to play on the console. With the knowledge and expertise of the Atari 2600, the group knew the ins and outs of the console and were able to create four new games to bring to the market.

The idea of a third-party developer took the market by storm. Inspired by Activision, many people tried creating their own games for consoles. Developers were pumping out new video games and the number of video game consoles flooded the consumer market. This inevitably led to the video game market crash and industry recession in 1983, a grim period for the video game industry that nearly wiped out the growth story as we know it.

This crash took a significant toll on Activision. After a decade of being bought out and tossed around by different investors, Bobby Kotick decided to buy out the company in 1991 for $500,000. He completely restructured the company, firing all but eight of the 150 employees to start with a clean slate. Since then, Activision has grown year after year and can be recognized as a household name around the world. 

1993: Activision went public under ticker "ATVI".

2003: Activision acquired Infinity Ward after which it went on to produce the hit CoD franchise.

2008: Activision bought out Blizzard Creations to merge the company and become Activision Blizzard, focusing on PC titles.

2016: Activision Blizzard bought out King Digital, to build on its mobile segment.

When Call of Duty MW2 rose to wild success in 2009, the franchise has never looked back resulting in the best selling console game of the year 9 out of the last 12 years.

Competitive Advantages

Franchises with Staying Power

The three most prominent acquisitions were Infinity Ward, Blizzard Creations, and King Digital. All three of these game-changing businesses are now large drivers of growth for the consolidated company.

Activision, alongside Infinity Ward, helped to bring forth the most successful first-person shooter ("FPS") game in history, CoD.

CoD alone contributes significantly to the value of Activision Blizzard's IP through staying power — the ability of the franchise to be relevant year after year.

Activision Blizzard Revenue by Brand (Q3 2021)

Source: Activision Blizzard Investor Relations

The acquisitions of Blizzard and King juiced the company's overall staying power to a whole new level. Adding World of Warcraft and Candy Crush to its franchise line-up added immensely dedicated player bases that keep coming back for more.

Players coming back for "more" is not merely a "bonus". It is a rare privilege that only the best of the best attain. Activision Blizzard has a line-up of some of the most engaging, powerful, and social franchises in the world.

The power manifests itself in two main ways:

  1. Activision Blizzard avoids astronomic research and development costs associated with spending millions of dollars on games or franchises that would be lucky to capture a few thousand players

  2. Activision Blizzard retains players and grows them through the network effects inherent in its business

This leads to the Activision Blizzard "formula": Retain a strong player base + host network effects + spend low incremental dollars operating costs = top-line growth and margin expansion.

The Flywheel Effect

We believe Activision Blizzard's three strategic pillars explain a wonderful flywheel effect that has fundamentally led to the success of the publisher.

The cycle goes something like this:

  1. Activision Blizzard builds and releases engaging games with great single-player and online experiences.

  2. Core players and / or first adopters appreciate the deep content and play the game(s) more and more.

  3. MAUs rise as word-of-mouth and online gameplay streamed on Twitch or YouTube attract new players.

  4. More users = more engaging gameplay, especially online. Players may be motivated to purchase additional features in-game.

  5. Additional in-game features drive engagement even further.

  6. Activision makes a lot of money and reinvests in new and improved gameplay within the franchise to fuel the fire (i.e., the flywheel effect).

  7. The cycle repeats.

We cannot emphasize enough how important it is to Activision Blizzard that it is one of the few major video game publishers that have outstanding, sticky franchises.

Outside of this core flywheel or network effect, Activision Blizzard is seeking new ways to keep players engaged. Esports, wider variety of in-game content and entertainment, and consumer products could significantly add to the durability of this flywheel effect.

Having its Cake AND Eating it Too

Activision Blizzard releases engaging content year in, year out without having to throw its entire balance sheet at new speculative concepts.

Since the company has the benefit of retaining a ton of its MAUs with gameplay experiences that are tough to be reckoned with by other games in the market, Activision Blizzard gets to enjoy high margins, tons of cash flow, and a strong player base.

For a company of its size in an extremely competitive market, Activision Blizzard boasts a cash to total debt ratio that few companies in the world have.

In simpler terms, the company has lot of cash and very little debt. This gives it ample room to experiment with new features in its franchises, explore optionality, and even acquire more businesses like it did with Blizzard and King.

With a balance sheet like this, opportunities are essentially endless.

A Look at Microtransactions

At first glance, many may question how Activision Blizzard is profitable with its entry into free-to-play ("FTP") gaming.

Two of its most popular games are completely free to start playing: Call of Duty: Warzone and Candy Crush.

Sales are driven by microtransactions ("MTX"), or in-game purchases.

COD Warzone's Shop for itemsSource: Call of Duty Warzone For $20, players can purchase this bundle to receive a new skin for a character and 2 guns, along with extra goods

In both FTP games, users have the ability to purchase items in a shop with real money. These items are usually cosmetic but can sometimes unlock more opportunities for the user. If these opportunities result in greater engagement, players will come back for even more. MTX have become the main stream of revenue for Activision Blizzard.

In Call of Duty: Warzone, the currency system is "COD Points". With these points, users can unlock new looks for players, guns, and even vehicles. Despite paying for items, every player, regardless of if they purchase an item or not, are on the same playing field when it comes to gameplay.

For Candy Crush, the MTX are for extra lives and moves in the game. At first, the developers made the game easy to incentivize users to continue playing. As a player progresses, the levels get more difficult. This is when microtransactions come in to save the day. Users can buy more lives, at a cost, to keep playing the game. In fact, in a single day, one individual bought $2,600 worth of goods in the Candy Crush store.

Candy Crush Shop for itemsSource: Candy Crush

Since both games are free, their user bases continue to grow with secular trends in gaming and mobile gaming in particular. This is great for the company as greater numbers of engaged users can drive more transactions made in the store.

Gaming Going Mobile...

Activision Blizzard has tons of skin in the game when it comes to mobile gaming. It took the mobile gaming market by storm with its release of Call of Duty: Mobile in 2019.

Although this is a FTP game, which drew in tons of players — over 100 million in just its first week — it turned out to be quite the cash grab for Activision Blizzard. How? In-game purchases and upgrades such as character boosts, weapons, skins, and others.

Popular Mobile ShootersSource: SensorTower

Activision Blizzard fortunately got into the mobile market at the right time with its acquisition of King. As a result, it can continue releasing content into the largest gaming segment in the world - mobile.

In 2021, mobile made up over half of the global games market. That's not all - mobile is also the fastest-growing segment in the games industry.

2021 Global Games MarketSource: Newzoo

Besides the secular trend benefitting the top line, growth in mobile will also benefit the bottom line to a greater extent than traditional console and PC games.

Since many mobile games are FTP, revenues are largely generated from in-game purchases and advertising. These MTX, downloadable content, and advertising revenues are high-margin sources that all benefit from the player or user not having to put up any money to purchase the game.

We believe Activision Blizzard is well-positioned for the growing importance of mobile as a means to play games. Smartphone usage is growing around the world and provides a play-from-anywhere medium that traditional consoles don't. We think its successes with Candy Crush and CoD: Mobile are merely prefacing what Activision Blizzard is capable of achieving in the mobile realm.

Activision's Overwatch League MatchSource: Variety.com

...And into Sports Arenas

We believe an underappreciated development (and strength) that belongs to Activision Blizzard is its powerful presence in eports.

Activision Blizzard runs two major professional esports leagues — the Overwatch League and the Call of Duty League — and the franchise teams that make up these leagues.

These leagues generate franchise fees and revenues from live in-person events. The market is growing, and it's growing fast. The total esports audience is expected to hit ~650M viewers by 2023, up from 495M in 2020 for a CAGR of 9%.

We believe Activision Blizzard will benefit greatly from the trends in esports due to the following:

  • Esports are popular and viewership is expanding quickly.

  • The company is landing strong partnerships, such as YouTube for exclusive Call of Duty League and Overwatch League media rights. This is also a source of revenue for Activision Blizzard.

  • Major sponsors like Coca-Cola, IBM, Xfinity, and even the US Army are pouring money into the leagues via promos and advertising. This is yet another source of revenue for the company.

  • Activision Blizzard hosts some of the most engaging multi-player games on the planet. It is no surprise its professional leagues are among the most popular globally.

Risks

Battlefield Sounds Like Bad Company

The biggest threat against Activision Blizzard is a company named Electronic Arts ("EA"). Every year, alongside CoD, EA releases an addition to its own franchise: Battlefield. Since the dawn of time, both of these companies have competed against each other to win the title of best FPS game of the year.  

Statistically, every year CoD surpasses the competition due to its ability to create such an appealing user experience through a well-written story mode and engaging multiplayer mode. Its release of Call of Duty: Warzone really helped to solidify Activision Blizzard’s reign.

But with success comes problems.

Call of Duty: Warzone is a great game, but it has its fair share of issues. The player base believes the game is unplayable at times due to cheaters, hackers, and unbalanced gameplay. Many have addressed the fact that since Activision Blizzard doesn’t seem to "care" about its players, they might permanently switch to Battlefield.

COD x Battlefield graphicSource: GameRant

EA has always trailed in game success, but these issues against Activision Blizzard may help to market Battlefield better.

Battlefield 2042 and Call of Duty: Vanguard both plan to release at the end of 2021.
If Activision Blizzard does not take an active stance on the issues that many players face, it could be detrimental for the future success of the beloved Call of Duty franchise.

This risk is not just limited to Call of Duty — Activision Blizzard must ensure players feel engaged and cared for year after year. If not, it risks losing a major piece of its MAU abse.

Bad Press

Activision Blizzard has been making headlines recently, and unfortunately, a lot of it is for the wrong reasons. The company has faced employee protests, executive departures, and community backlash over allegations that a "frat boy" culture is fostered at the company. Not only that, there are further allegations that women are treated poorly and harassed by their male colleagues.

The failure of Activision Blizzard to resolve these issues and / or face the "brain drain" effect as key members of the company resign or leave to competitors could have a significant negative impact on its ability to produce quality games on time.

Game Delays

Game delays are a severe risk that frustrate gamers and shareholders alike. To prevent these two important stakeholders from becoming anxious and jumping ship to other companies, Activision Blizzard must make sure it delivers content well and on time.

In Q3 2021, Activision Blizzard announced two highly anticipated games, Overwatch 2 and Diablo IV, will be launching later than expected. Players must now wait longer than expected and find entertainment (likely from competitors) to keep them occupied, while investors sell (the stock plummeted after this announcement) as cash flows anticipated from these game sales will now happen further out in the future.

China Crackdown

The Chinese government recently cracked down on Chinese residents under the age of 18 and the amount of time they may spend playing online video games each week. Minors are now allowed to only play online video games between 8 and 9 pm on Fridays, weekends, and public holidays.

This may drastically reduce the demand for video games. However, Activision Blizzard has a low amount of revenue exposure (<5%) to minors in China. This seems small, but there is uncertainty around what may be restricted for Chinese adults in the future as well, a demographic group that makes up a larger chunk of the company's revenues.

The Bottom Line

Activision Blizzard’s main goal is to provide gamers with an exceptional and engaging experience. From its blockbuster franchise Call of Duty, to its exciting PC titles, World of Warcraft and Overwatch, Activision Blizzard wants to be home gamers and recreational players.

What makes the business so special is its emphasis on expanding its scope to all types of gamers: console, PC, and mobile. This wide reach helps it provide content to all kinds of users, ensuring a growing player base and MAUs accordingly.

To set up for success, Activision Blizzard plans to focus on expanding its audience even further, deepen its user engagement, and increase its investment for the players. This will help to solidify its name even further in the video game industry.

The biggest concern with Activision Blizzard is its ability to listen to the player base and act accordingly. Due to the past events with Call of Duty: Warzone, gamers are considering a switch to the main competitor EA with Battlefield 6, unless actions are taken. Investors should be aware of how Activision Blizzard acts upon these issues.

Activision Blizzard has seen tremendous growth over the years due to its ability to create great games for its player base. Its wide business structure, growing player base, and use of microtransactions are what will set it up for future growth and allow it to be home to the gamers.

The company will continue to be able to utilize its valuable intellectual property (IP) which has immense staying power and monetize the game franchises in more ways.

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