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Activision Blizzard: The Growth Is Already Priced In

Mar. 07, 2018 3:52 PM ETActivision Blizzard, Inc. (ATVI)51 Comments
Michal Stefaniak profile picture
Michal Stefaniak


  • With FY2017 results coming in higher than guidance and consensus, ATVI is ambitiously exploring new growth avenues.
  • There are many possible opportunities for growth: monetizing through micro-transactions, advertisement, e-sports, deals for exclusive distribution of third-party products or higher sales of adjacent merchandise.
  • However, historically, the company experienced poor organic growth, product sales are falling, industry is increasingly competitive, and how the players' community will adapt to new monetization methods is uncertain.
  • Current market value seems to price in most of the future growth and the stock appears to be fully valued. Investment in ATVI stock at current price does not appear.


Video game industry is surely a hot one. The stocks of publishers and developers have been soaring amid new methods of extracting dollars from existing and newly created IP. However, the enthusiasm has been somewhat cooled, with risks of aggressive monetization being more and more apparent. As we are entering the next stage of growth and general awareness of these (i.e. video game) investments, the risk/return proposition is changing as well. For some time already, it's no longer a time when video games were considered as something juvenile and not worth looking into and the respective stocks were under-covered. As these stocks became more and more popular, the prices rose, multiples expanded and the question arises: is there really much more growth not already recognized by the market?

Business and industry overview

Activision Blizzard Inc. (NASDAQ: NASDAQ:ATVI) is an international publisher and developer of video games for PC, consoles and mobile devices. The company operates under three segments: Activision, Blizzard, and King. The company in its current form is a result of merger between Activision and Vivendi (owner of Blizzard) in 2008 and an acquisition of King in 2016. Key franchises include: Call of Duty, Warcraft, Overwatch, Candy Crush.

Recently, together with the whole video game industry, ATVI experienced a solid rally in its share price, rising by over +50% over the last twelve months.

The general positive perception of ATVI stems from both rising top and bottom lines as well as from dynamic developments in the general industry, discussed below.

Key industry trends

Mobile devices - increasing meaning of capitalizing on casual games of 'match three', 'clickers' or 'bubble shooters', usually available for free. When free-to-play, monetized through in-game purchases. More advanced games are usually paid apps, but nonetheless, often feature paid content.

Micro-transactions - initially mainly used for

This article was written by

Michal Stefaniak profile picture
Long/short equity.-------------------------------

Analyst’s 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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Comments (51)

The more microtransactions these companies try to push out at the expense of quality the more they will destroy their Intellectual Property. Games are being released half finished and put behind paywalls and gambling style loot systems. Wall Streets short-term quarterly thinking is going to deteriorate the industry and the young talents willingness and desire to work in these new office sweatshops. In what industry is it ok to release half finished products? Blizzard had a perfectly working subscription and traditional based model. They provided a game or service then released expansions to further capitalize on the franchise. Cd Projekt Red has become a golden child in the gaming community for sticking to this model and has been gaining incredible amounts of loyalty from its customers.
Joseph Diamon profile picture
Great article on ATVI, this is one of the top-5 holdings in our "Wide Moat & Profitable Growth" portfolio! Despite the valuation currently being extended, ATVI has been a double bagger for us in just over a year. We like their positioning in a key E-sports/gaming market and continue to see value here over the next 5-years! You can see our outstanding portfolio and picks that we think all investors must own here: http://bit.ly/2uQ4t0h
Michal Stefaniak profile picture
Thank you for reading, RobinhoodStrategy.
GDPPP profile picture
To me, ATVI looked overvalued in the 40s, just like AMZN in the 600s and 700s. Since then all they've done is keep rising to ATH. Investor sentiment is extremely bullish on B2C type businesses, so some caution is warranted. Although with this market driving momentum growth stocks higher one never knows how high these can continue to go until the music stops. Long ATVI and thanks Michael for putting forth a detailed article on a solid company.
Michal Stefaniak profile picture
Thank you for reading, GDPPP.
Why end the WOW subscriber base chart mid-2015?
Michal Stefaniak profile picture
Because ATVI has not been reporting the WOW subscriber base since then. Probably due to deterioration of that metric.
EmileCrocodile profile picture
Nice work
Michal Stefaniak profile picture
Thank you for reading, EmileCrocodile.
Gaming industry is going to go lower because of gun talks
notsouki profile picture
People from countries with with little to no gun violence play violent video games. Get out of here grandpa.
With...with...stop stuttering...and it’s daddy not grandpa...son
Seriouspatt profile picture
@notsouki: Anyone who has half a brain knows there's no causation between the two.

...but there are so many morons among ordinary folks and the NRA is desperate to point the finger at anything except themselves.
Sony is pushing out more quality games and none of them has micro transactions
Seriouspatt profile picture
not yet
ATVI is just getting started in the mobile gaming market. Ads will become a big source of revenue. I also believe Virtual Reality will bring in new gamers. I have since 39 and am not selling anytime soon
Michal Stefaniak profile picture
Sure, this thing is certainly one of the top 3 things worth watching at ATVI. However, the one thing is King losing not engaged players, which does not have significant impact on the overall revenue from this segment, as these players did not engage in micro-transactions. The other thing is losing overall MAU base, engaged or not, in context of advertising - even players engaged in a small way will be watching the ads, assuming they do not buy ad-free version, due to lack of engagement, hence the profits will be growing as long as MAU base is growing. Keeping in mind that King's MAUs have been steadily falling in the recent past, I think it can potentially offset the great potential of mobile ads.
It looks like stock has been climbing. If you are shorting this stock you are making a big mistake.
Michal Stefaniak profile picture
-17% since high, does it look like climbing to you?
NV_1790 profile picture
Nice article. I would like to add my two cents though,

"Insider transactions at ATVI are worrying" I believe many of these insiders bought a substantial amount of stock during the Blizzard merger so I would not consider this an issue.

"Increasing competition from both non-pure play companies like Microsoft or Apple and independent developers" I believe MSFT has already enough problems breaking out of Halo and Gears of War to be an issue for ATVI and I am not quite sure but I believe Apple is not in gaming market in any meaningful way (same with Google). Also, I think you failed that while there are more methods of distribution the development cost keep increasing.

you may be right in the short term especially considering the thin slate this year (Just a new COD and a destiny expansion, so far)
Michal Stefaniak profile picture
Thank you for reading, NV_1790. Also, thanks for your comments.

On insider trading - I do not think it's a major issue, with this kind of insider selling. However, a combination of hundreds of millions worth of selling after a major run-up plus almost non-existent insider buying in the market over the last decade should give at most neutral, if not slightly negative outlook. No major red flag though.

Non-pure play competition - I agree, currently they are not big players. However, considering all the cash they are generating, I would not be surprised if MSFT or AAPL would decide to invest heavily to buy into the industry either through some M&A or heavy in-house spending, especially if the industry will be outgrowing their core ones.
And what is even more important in my opinion is the fact that MSFT and Sony control the console market, Google controls the mobile app distribution market for Android and AAPL controls both mobile distribution for iOS and significant mobile device market. You can look at what's been happening in retail in recent years, where the retail chains (i.e. owners of the distribution) have been introducing their own white label brands and devoted more and more shelve space, sacrificing the space previously dedicated to other 'outside' brands. I think that if you own the device/platform/distri... sooner or later you will try to exploit this edge. I do not mean that, for example, King's games will be banned from iOS/Android, but that the competitive nature of the industry is much more likely to increase than not. Which is not a good thing for ATVI.
2019 growth seems already priced in too. That being said I think it will still go up a little
Anyone else concerned about the stock dilution? Going by Google Finance's numbers of shares outstanding at the end of each year and using yesterdays closing price of $74.07, $931,059,900 worth of stock was issued in 2015, $814,029,300 in 2016 and $890,321,400 in 2017.
great written article and although you wrote so much, you missed a lot to. a technical analysis of atvi would indicate that it will have a hard time falling below 66, so not a lot of downside here. for the downside of WoW compare it to other mmo's its doing great and they will reengage players with either another mmo or expansions if need be. the upside forgot to mention the team. between bungie, cod, and overwatch who better to control first person shooters and esports. this is the company that created starcraft. then with king they have all the mobile stats they need. the next games they release will be sure crush it. they are in the best position to run the gaming market. as far as priced in, there is only 2 other US gaming companies to compare them to. I can easy see this going up 25% from q3 to q4
Which companies do you mean when you say there is only 2 other US gaming companies to compare them to? EA and ... ?
what about company debt? 4 billions.
Michal Stefaniak profile picture
The company carries debt on its balance sheet, however if you account for the cash and equivalents, you end up with net cash, hence a healthy balance sheet.
Thank you for the excellent analysis! Much appreciated.
Michal Stefaniak profile picture
Thank you for reading, calgsr99.
I think there is a little myopia relating to Blizzard's products, both current and future. You cite WoW as a sad shadow of its former self, yet the game is approaching 15 years old and maintains millions of active users. There were 3 full Warcraft games (RTS) that came out before WoW. All quite popular, hence the development of WoW. Starcraft had similarly powerful followings. The same can be said for all 3 Diablo games. Additionally, each of these games had expansions (except the original Warcraft, to my knowledge) which were well received. All of their games have memorable and well developed characters and unique gameplay mechanics. Overwatch is exploding. I played a competitive match the other night with an equal distribution of genders and an age range going from sub 20s to over 50. The over 50 player was a mother who got into the game with her 27 year old son and had logged over 400 hours on her main character. I've been gaming my whole life and this was a big surprise to me.

Blizzard makes games that people want to play and that people continue to play.

With the rise of esports, the growing popularity of Overwatch, and Blizzard's uncanny ability to create deeply detailed and immersive worlds populated by rich, well developed characters, I see this company as significantly undervalued in the mid-term.

The public's lack of knowledge about Blizzard's next game(s) is not a convincing enough argument to distract me from their decades long track record. Considering that the children who grew up on Warcraft, Starcraft, and Diablo are now having kids of their own leads me to believe we have a recipe for an entire new generation of gamers playing games published by studios that their parents loved (and continue to love).
Overwatch is garbage
soajustice profile picture
As someone who first bought ATVI around $23, I can tell you that this company has never traded in-line with fundamentals (it's been overvalued since then). You pointed out why this name will continue to push higher regardless of those risk:

"Leading position in the industry with well-established franchises"

Any new investor coming into this space would/should ask the questions: Who's the leader in the industry? Who has the best "well-established" and loved franchises? The rest is noise.

Seriouspatt profile picture
I'll add one more question:

"Who's eagerly ruining those beloved franchises?"

I have been following Blizzard since Diablo 1 and have stopped playing their games a long time ago. You'd need to pay me to play them, because that's exactly what they feel like: A job.

Maybe that business model will continue to work though and I'm just getting old.
soajustice profile picture

Haha, I don't play any of their games (personally love CSGO still!).

But I know way too many people that continue to love COD, Overwatch, Destiney, etc.
vooch profile picture
my guess is one of these enterprises ( EA or ATVI ) will develop into a entertainment behemoth like Disney.

Recall that Disney started making little cartoons.
07 Mar. 2018
Is the possibility of cloud-based gaming already built in? How about revenue streams that would be generated from alternative means of advertising? I, for one, think that these companies could bring in more via advertising...perhaps by giving gamers the option to receive in-game currency by allowing for some advertising. Just not sure that this industry won’t evolve in some meaningful ways in the coming years.
Seriouspatt profile picture
As an investor I am fascinated by Activision-Blizzard, Ubisoft and EA. As a gamer I hope all three go down the drain, quickly.

Their business models don't produce good games anymore, they produce cash cows. I recently bought Mass Effect Andromeda for 20 bucks (not spending a single cent on ingame content) and it is a shadow of the glory of its predecessors.

Investors should hope gamers never discover how bad these games actually are and what they really are designed for, because as soon as this happens and the lootbox-mania ends, margins will decrease.

However, todays gamers seem eager to be ripped off, so these companies might just be getting started.
EA always makes me feel I'm only buying half a game. you have to buy DLC to get the ending. At least ATVI makes you feel like your getting added content in theirs.
Lifelong gamer here. My layman user's opinion: EA is in it for the money, Blizzard is in it for the cosplay, Activision is in it for the bros, Ubisoft is in it for the highlight reels, and Square Enix... oh, how the mighty have fallen.

That said, I'm loving the market accessibility that platforms like Steam have given to indie publishers. There are some real gems out there!
vooch profile picture
dang - a incredible analysis; solid overview touches all bases

I do disagree with your DCF model. Go out 10 years and the add the 2% terminal growth rate. might change NPV.
Michal Stefaniak profile picture
Thank you for reading, vooch. As I mentioned in the article, this kind of analysis is quite sensitive to particular changes. However, considering the almost 0% organic growth in the past years, I think it can be prudent to forecast growth only several years ahead and then plug in more conservative rate of perpetual growth. Nonetheless, should a significant change to the story develop, the growth projections could be extended.
vooch profile picture
we were taught, at Columbia, to be very careful when Terminal Value is too great a percentage of the Enterprise Value.
Agreed that growth is already priced in. sold at $74 from $58. Will probably get back in during a meaningful pullback or before new CoD releases
dieselap13 profile picture
Nice spread! I got in at $30 :)
Why did u sell ATVI now???
I got in at 19
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