California-based company, Activision Blizzard (NASDAQ:ATVI), has lately drawn the attention of investors and gamers around the world due to some of its successful video game launches. Today, the organization manages to stay a leader in its industry, competing against companies like Electronic Arts (NASDAQ:EA) and Disney (NYSE:DIS). Yet, there are some uncertainties that, to some extent, cloud an investment decision on this business. On one hand, there are several positive aspects about this company, like the fact that Warlords of Draenor revived World of Warcraft's user base, increasing it back to 10 million subscribers. On the other hand, there is an ongoing concern that the company's greatest assets, Call of Duty and World of Warcraft, are declining in terms of sales and engagement at a preoccupying pace. However, the organization's management seems to have a solid plan to address this, as it is launching new appealing products that have potential to become the next top franchises. As it seems, despite some concerns, the company could garner significant benefits in 2015 due to a well-diversified product portfolio, which contains two valuable top franchises and new promising video games.
The Value Behind The Top Franchises
Activision Blizzard currently enjoys a diversified product portfolio that consistently garners revenue from its different franchises. At the moment, the company's top sales drivers are Call of Duty and World of Warcraft. In regards to the former franchise, it was lately estimated to have accumulated over $10 billion in sales since its creation in 2003. Today, it is the favorite first person shooter choice for many gamers. Its latest release, Call of Duty: Advanced Warfare, is the biggest entertainment launch of 2014 in terms of revenue, surpassing other video games, films, music, and books. Yet, in contrast to other past video game releases, the company has remained quite discrete about exact sales numbers. Nevertheless, it did state that sales in the first week were much better than its precursor, Call of Duty: Ghosts, and also provided metrics that show high engagement (+370 million matches played and +200 million level ups in online multiplayer mode). Lastly, Advanced Warfare has finished 2014 in the first place of the Top 10 UK games chart by GfK, staying ahead of blockbusters like Grand Theft Auto V and FIFA 2015. So the franchise shows how it is still excelling within its market even though it has not matched the success of Modern Warfare 3.
In addition, Call of Duty contains two important aspects that reflect its real value: a global brand with a large fan base, and the shaky reputation of its main substitute - Electronic Art's Battlefield. Even though at this point its growth may be limited, Call of Duty can continue to offer benefits to Activision through the release of new editions and digital content. The main advantage of releasing digital content is that it allows the franchise to further monetize the large size of its fan base while adding value through a relatively low investment, contributing to higher margins and greater returns. Regarding its main substitute, Battlefield, Electronic Arts did not launch a new edition for the 2014 Holidays, plus many users have complained that the last edition contained several bugs and issues even after patches, showing clear unsatisfaction with the video game.
In regards to World of Warcraft, it also contains valuable characteristics that point towards a profitable future. For a long time, this game has been the preferred option for gamers around the world, gathering up to 12 million subscribers in 2010. After a significant decrease to about 7 million subscribers, the franchise has managed to increase its subscribers back to 10 million thanks to the release of Warlords of Draenor. Moreover, it is quite likely that many of these users were old ones that got back into the game, compelled by the effective marketing strategy displaying the new features of the game. In that manner, Activision Blizzard has demonstrated that it is able to recuperate its audience after a considerable contraction, which demonstrates the prevalence of a well-established brand with a strong bond to its customers. As the largest MMO game today, Warlords of Draenor has temporarily raised a stronger barrier of entry for substitutes due to its size and popularity within its gaming genre.
Addressing The Concern Behind Slowly Declining Franchises
Yet, the main concern at the moment is that these two large franchises are aging and declining in the long-term. Even though they do hold real value that offers massive benefits for the company, it is still ideal to have younger franchises able to cover the possible losses from older and declining ones. For that matter, Activision has properly launched new franchises with potential to provide the company with further rewards in the future. In the kids' video-games segment, Activision holds the leadership with Skylanders. This franchise has recorded over $2 billion in sales since its creation in 2011. Plus, in its Q3 2014 report, the company stated that Skylanders has sold more than 200 million toys, and is outselling the #1 best-selling action figure line in Europe and North America for the third consecutive year. Its latest release, Skylanders: Trap Team, allows gamers to capture villains from the video game into their real world toys in order to use them within the game. As a result, it encourages its users to buy its toys in order to fully experience the game, a smart strategy to expand monetization. In that sense, its high popularity and quality offer a strong competitive advantage over its main competition, Disney's Infinity.
In addition, the company recently launched Destiny and Hearthstone. The former is a first person shooter game, which grossed more than $325 million in its first five days since release. This game shows strong engagement metrics, with 9.5 million registered users playing more than three hours a day on average. The latter is a free-to-play cards game which currently has more than 20 million users, plus it has quickly gained strong popularity in the gamer community and e-sports events. In that sense, this video game seems able to reap great returns in 2015 by monetizing its large user base. Moreover, Activision Blizzard will release the mobile version of Hearthstone in early 2015. This will allow the company to further step in the burgeoning mobile games market, which is estimated to reach $35.4 billion in sales by 2017.
Although the company has solid foundations, there are possible risks to take into account. Investors should remain vigilant on Call of Duty and World of Warcraft along 2015 in terms of sales and engagement. So, it is important to watch closely the next release of Electronic Art's Battlefield and its impact on Activision Blizzard. Moreover, it is still uncertain whether World of Warcraft will manage to hold or grow its 10 million subscribers. Because these two franchises are aging, it is key to monitor the progress of new ones like Skylanders, Hearthstone, and Destiny. In the case that these new promising video games start to considerably underperform in terms of sales and engagement, it could be wise to consider selling the stock.
In conclusion, this assessment classifies the Activision stock as a buy, with potential to garner significant benefits in 2015. The company currently counts two aging franchises that still hold substantial value and advantages over competitors. For that reason, these are likely to deliver high returns in 2015. Moreover, its leading cash cow - Skylanders - and new videgames Hearthstone and Destiny - show great upside potential for the next few years. Still, it's key to watch the performance of these franchises in the future, and evaluate whether they can truly become significant and sustainable sources of revenue.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.