Seeking Alpha
What is your profession? ×
Long/short equity, event-driven
Profile| Send Message|
( followers)

Summary

  • Activision Blizzard's games have been adopted well on the new-generation consoles.
  • Activision Blizzard has lined up a number of new launches in the coming months that will lead to strong growth in its financials.
  • Activision's impressive fundamentals, and the problems of its competitors indicate that the stock hasn't run out of steam yet.

The new console cycle has been a key catalyst for gaming companies this year, and Activision Blizzard (NASDAQ:ATVI) seems to be making the most of it. Already up 30% this year, Activision's impressive gaming pipeline and the popularity of its existing franchises will continue to aid the company's strong growth going forward.

In fact, Activision has popular entertainment franchises, along with engaging online communities such as Call of Duty, Skylanders, World of Warcraft, Diablo, StarCraft, and Hearthstone. Looking ahead, the company intends to continue capitalizing on its intellectual properties

A strong pipeline

Activision has identified several opportunities to create content for new platforms, higher-margin business models, and new geographies. For example, during the second quarter, Activision Publishing had the number one selling title till date on the next-generation consoles in the form of Call of Duty: Ghosts. It also grabbed the second title position in the industry year-to-date with Skylanders SWAP Force.

Looking ahead, Activision is intent on following up its successful franchises with new ones. It has lined up Destiny, along with the next iterations of Skylanders and Call of Duty for release going forward, and these new launches will drive its performance in the second half of the year.

Activision plans to launch Destiny on September 9. The beta test for the game lured more than 4.6 million players with collectively positive feedback. Hence, the game seems to be getting good reviews. In addition, Destiny is expected to become a highly-successful game for Activision, with management counting on it to become its next billion-dollar franchise.

Since the game has already seen strong customer response, and enjoys first-party support from Sony (NYSE:SNE), it should do well. In addition, Activision sees robust demand from the retail segment, strong digital distribution partners, and a well-built pipeline of digital content to sustain the game's performance in the future.

Activision is already seeing strong growth in pre-orders for its new intellectual properties, which can be attributed to its upcoming releases. Activision plans to release Skylanders: Trap Team on October 5. In Trap Team, Activision is enabling kids to bring their toys to life, and also allowing them to bring life to their toys. Here, the additional feature is that this time, when the player defeats the negative characters, he can detain them in a crystal trap and force them to fight for the player. This is another innovation to the toys-to-life genre, and should help Activision increase its popularity.

Already, the Skylanders franchise is witnessing good traction, as evidenced by a 50% rise in its Skylanders YouTube channel views as compared to last year. Hence, Skylanders is expected to help Activision tap the toys-to-life category successfully once again this fall.

Call of Duty: Another big catalyst

Activision's pipeline includes the next installment of its popular Call of Duty franchise. It plans to launch Call of Duty: Advanced Warfare on November 4 this year. Activision is looking to tap the popularity of the franchise through an open launch window, which it is leveraging with robust first-party support from Microsoft (NASDAQ:MSFT), along with distribution partners and its marketing programs.

The upcoming game's popularity can be gauged by the fact that its reveal trailer was the top viewed entertainment trailer during the second quarter, outperforming movies and television shows in North America. Further, Call of Duty is projected to be the most pre-ordered game of the year, and Activision sees strong purchase intent for the title.

Activision is also focusing on the online gaming market in China. The company is seeing strong momentum for Call of Duty Online in China. Activision has launched its first major free-to-play initiative with the game. The company is strategically rolling out the game in association with Tencent (OTCPK:TCEHY), one of the leading game operators in China.

The World of Warcraft universe is still strong

Activision has also initiated the beta testing for World of Warcraft: Warlords of Draenor during the second quarter. Meanwhile, Hearthstone, based on the World of Warcraft universe, is already doing well. The company launched the game for the iPad in April, and it has been received well. Hearthstone has brought a number of new players into the Battle.net ecosystem.

In addition, Activision will also profit from the launch delays by other gaming giants. Electronic Arts (NASDAQ:EA) is planning to delay the launch of its "Battlefield Hardline" game, its marquee shooter game, to next year. Moreover, Take-Two Interactive (NASDAQ:TTWO) is also planning to delay its shooter game Evolve. This will give Activision's Call of Duty a free run during the holiday period.

Impressive prospects backed by an attractive valuation

An interesting thing about Activision is its valuation. Trading at a trailing P/E ratio of 25.91 and a forward P/E ratio of 15.83, it is expected that the company's bottom line will continue getting better. In addition, the company's cash flow metrics are strong, as Activision has generated $1 billion in operating cash flow over the past year, along with $919 million in free cash flow.

Also, over the next five years, Activision's bottom line is expected to grow at a decent pace of 16.6% a year, which makes the stock an interesting proposition at its current valuation levels. Hence, considering Activision's strong gaming pipeline, investors should take a closer look at it from an investment point of view.