Activision: A Minor Misstep In A Full Marathon

| About: Activision Blizzard, (ATVI)


ATVI reported a weaker Q4 with guidance below consensus.

Skylanders, Guitar Heroes and Blizzard disappointed, while Call of Duty remains strong.

Continue to like the name and growth outlook driven by eSports and CoD.

Activision (NASDAQ:ATVI) delivered a surprising misstep, as Q4 revenue and EPS both missed consensus estimates. Three core titles/areas, Skylanders, Guitar Heroes and Blizzard, disappointed and the positive momentum from Call of Duty was not able to offset that weakness. More concerning, 2016E guidance came in at the low end, and the company is delaying the next full game, Destiny, into the 2017 time frame. The selloff clearly highlights the challenges the company is facing, but I would be buyer of this stock given its long-term prospects.

In short, ATVI continues to hold multiple award-winning gaming franchises and the recent take-off of the eSports trend is highly supportive of ATVI's titles. While I acknowledge that there are concerns over King Digital's (BATS:KING) sustainability and the weak casual titles, I think ATVI can still post meaningful revenue and earnings growth in 2016. As such, I remain bullish on the stock. Among the major game developers, my preference is towards those with a global presence, solid brand equity and proven execution track record. ATVI certainly fits this bill, whereas mobile game developers such as Zynga (NASDAQ:ZNGA) continue to see growth challenges in years ahead.

The key positive in the quarter is Call of Duty, which saw revenue up double digits y/y and ended the quarter with the highest MAUs in the franchise history. The latest installment of Black Ops III had the biggest opening weekend last year and was the number one console game globally, making the franchise the top best seller in North America for the seventh year in a row. ATVI has been quite aggressive on Call of Duty, having recently developed an eSports league dedicated to the franchise. My view is that CoD eSports could contribute meaningfully to ATVI this year, judging by the increasing level of interest surrounding the franchise. Worth noting, MOBA titles such as League of Legends and DOTA have dominated the eSports scene for the past decade, but the recent rise in the first-person shooter genre is very accretive to CoD growth. Indeed, NPD data from January continues to show that CoD is leading the pack in console sales. With national media platforms, including ESPN, Turner Sports and Yahoo (YHOO), ramping up dedicated eSports coverage, I believe that CoD could deliver positive impacts to ATVI's revenue in the back half of this year.

On the negative, there is still considerable doubt on the impact of KING. While I agree that the acquisition of KING is a surprise to many given ATVI's focus on console-based games and prior aversion toward mobile, the shift in gaming trends toward mobile necessitates the acquisition because ATVI cannot fight against the trend of mobile and digital gaming. With KING, ATVI addresses its biggest weakness in mobile and takes on close to 474m monthly active players onto its platform. This gives ATVI a chance to develop mobile content and cross-sell ATVI products to KING's user base. Also worth noting, KING's demographics of casual and predominately female players may not initially draw to ATVI's hardcore first-person shooter or multi-online battle arena titles, ATVI's resources could allow KING to develop newer titles and cross-promote them to KING's player base. The biggest overhang that ATVI has regarding KING is that many investors are afraid KING is turning out to be a Zynga. Under such a scenario, ATVI would warrant a considerable discount, but I would argue that the share pullback post quarter is starting to reflect that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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