Alex Cho
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Activision Blizzard: Stick with Overwatch and Not Pokemon Go

So, I guess you’re probably wondering who was the big winner in the most recent NPD report? Or maybe, I’m just asking a rhetorical question, or you probably don’t care at all.

In either case, the company that seems to be taking the lead is Activision Blizzard and I believe the company is still somewhat undervalued post the integration of King Digital Entertainment. Furthermore, I believe investors can rally around the stock given the recent strength we’ve witnessed in the broad stock market.

Source: PiperJaffray

When excluding the impact of King Digital, ATVI was able to post 3.4% y/y revenue, which was mostly driven by physical disc sales. Please keep in mind that the referenced figure was driven by the Call of Duty Black Ops 3 bundle. The QTD (quarter to date) NPD figure estimates 18% y/y revenue growth in the period, but from what I understand the figure doesn’t include the impact of full game downloads. So, if anything the organic growth rate of ATVI’s core franchises were likely stronger, but then you have to tack in the accretion impact of KING, and you arrive at fairly blistering growth rates for the company in the prior quarter.

Now keep in mind ATVI was able to report a beat on the prior quarter, but this was mostly driven by aggressive estimates on King Digital churn, as investors weren’t anticipating a whole lot of contribution from the mobile gaming division. Furthermore, it’s also worth noting that in Q1’16, the gaming space was mostly dominated by Ubisoft, which dominated due to the launch of Far Cry Primal and The Division. The two game titles establish new tent pole franchises, whereas ATVI was able to launch its own new tent pole in the following quarter, i.e. Overwatch.

The game most likely drove sales in terms of physical software, but when you recall that it had a strong reception among enthusiast PC users where the digital sell-through is substantially higher (somewhere in the 80% range whereas consoles typically do 30%), the NPD figures mask the performance of ATVI in the prior quarter.

Source: Freestockcharts

Furthermore, it’s worth noting that Overwatch is only captured in the month of May and June. The impact from the launch of franchise leading sequels has yet to be felt i.e. Call of Duty: Infinite Warfare, Destiny: Rise of Iron, Skylanders Imaginators and World of Warcraft: Legion. The impact of these additional titles in 2H’16 and the ramping revenue of Overwatch plus King Digital should translate into above consensus revenue for the next couple quarters. Furthermore, it’s worth noting that the company reported GAAP revenue growth of 50% y/y, which should translate into some earnings momentum, but not to the extent that we’ve witnessed in Q2’16. The comps over the summer months are much easier to beat, and the impact from a new title starts to diminish once it’s in the retail channel for around 6-months.

Despite these concerns I think investors should still pile into ATVI at these current levels. A small resurgence in World of Warcraft, and modest success in the Call of Duty franchise is the only requisites for a successful 2H’16.