Another big holiday, another benchmark for Activision Blizzard (NASDAQ: ATVI) to see how well its "biggest half ever" is going. While the company was expecting it to be a situation where it would blow everybody out of the water, it's running the risk of being more about hype than about substance. From a sales perspective, blockbuster titles like Destiny and Advanced Warfare met expectations as the #1 selling games in their respective categories, and Skylanders continues to succeed with children, which will look good with investors. Yet at the same time, cracks are beginning to show with some of the franchises, particularly the aging Call of Duty franchise. As the next generation of consoles comes into its own, and competition from independent game developers and fellow AAA studios ramps up, "franchise fatigue" may start to take its toll on the company's bottom line, encouraging either innovation or relegating another one of the company's main franchises to the money-making pile rather than the cutting-edge pile.
Advanced Warfare sells well, but not that well
As expected, Activision topped the charts for November thanks to Call of Duty: Advanced Warfare. The perennially strong franchise was met with warm reviews and strong sales both digitally and in retail outlets, and combined with Destiny's historic autumn, Activision owns the top 2 spots for new releases in 2014. In addition, Skylanders earned the title of No. 1 kid's game for the year, as the toy-based multiplayer game proved another successful game release for the franchise. Activision wanted the second half of the year to be special, and by looking at sales figures, it would appear that they are succeeding.
Yet the numbers mask a possibly worrying trend that this might not be as great a quarter as the company hoped it would be. While Advanced Warfare topped the charts, year-over-year sales were 27% lower than the 2013 release of Ghosts, which was 19% lower than Black Ops 2 from 2012, which was 17% lower than Modern Warfare 3 than 2011. Taken together, Advanced Warfare sales are down 49% compared to Modern Warfare 3, indicating that there are signs of "franchise fatigue" among consumers, as well as a sign that competition from fellow AAA developers and independent studios is increasing for this time of year.
Falling into the Warcraft trap?
Once the untouchable standard for first-person shooters, Call of Duty is now inspiring comparisons to fellow big-money franchise World of Warcraft, which has suffered "franchise fatigue" for the better part of the last half-decade. In both cases, sales and player activity are retreating from highs in the last decade, even as both games continue to be big revenue sources for Activision, which will continue as long as the game has a loyal following. It speaks to the strength of the franchise when a game that sells half as well as a predecessor is still No. 1 for the month, but to avoid stagnation, it may be time to take the franchise in a new direction like it did when it went from World War II-themed to the modern day. There is a lot more variety in gaming, and Call of Duty is definitely not the only FPS out there, so even though it can be a cash cow for a long time, it might need to think of a more compelling story to get more gamers interested in it beyond just the shooting.
Investors getting concerned, should you?
Activision's strong sales figures weren't enough for investors to overlook the year-over-year decline for major titles. Last week, Piper Jaffray, responding to the NPD data, lowered its price target for Activision down to $24/share, or roughly at the 52-week high. The Street also downgraded its recommendation from Buy to Hold, citing the company's industry-trailing 9% revenue growth year-over-year for the quarter, as well as a -$140 million net cash flow. This doesn't indicate the kind of market strength Activision was looking to demonstrate at its next earnings report, which would take into account all of 2014. The company should still beat on revenue thanks to the strong performances of many of its titles, especially Warlords of Draenor, but unlike early in 2014, this won't be the kind of beat Wall Street will jump at the sight of. It's still a strong player in the industry, and a very stable company, but it doesn't appear like the explosive growth from 2014 will carry over into the new year.
Disclosure: The author is long ATVI.
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