Activision Blizzard (ATVI, Financial) is the result of a merger back in 2008 by Activision, a console video game powerhouse, and Blizzard, the largest PC video game publisher. Together they make up a brand that is loved by almost every gamer on the planet. Their franchises include: World of Warcraft, Call of Duty, Destiny, Skylanders, Guitar Hero, Diablo, Hearthstone, Destiny and others.
Source: Blizzard Activision Company website
ATVI faces the challenge of the declining World of Warcraft franchise but is actually succeeding in managing that decline fairly well. World of Warcraft is still the most important franchise in the company’s stable but with Hearthstone the company put a promising new horse in the race. ATVI Blizzard is the premier player creating immersive deep game experiences. The company is not creating fun-for-awhile mobile games but games that can be played in multiplayer, competitive games and games that can captivate players for years. In the emerging esports market, its games take central stage. What is so interesting about ATVI is the relationship it builds with gamers. Its products are available through the company-owned Battlenet platform. I always buy new releases through this platform which downloads the software immediately to my PC without the need of a store visit. The price is the same as in the store so that tells you something about the margin there. With the advance of the cloud, gaming now takes place on the company’s server instead of on your harddisk in the privacy of your home. The company collects a boatload of data on your gaming style and preference. This information is used to more accurately calibrate the difficulty of releases, to update and patch games, to observe and predict what type of content gamers love and more. Because ATVI has an incredibly large installed user base, it knows better than anyone how to build fun engaging games with content that is both interesting and challenging. There is still competition from the likes of Take-Two, Electronic Arts, Sony, Nintendo and Microsoft, but it becomes increasingly hard for small independent publishers to compete with the top level experiences released by ATVI.
Increasingly, the company experiments with ways to monetize its relationship with gamers beyond the initial purchase. Releasing expansions has been a tried and tested successful formula, but the firm also tries to sell downloadable content and experimented with marketplaces for virtual items (the latter experiment has proven to be unsuccessful so far).
The company balance sheet is in tip-top shape with about ~$4 billion of debt being canceled out by approximately the same amount of cash. This is a good thing because the company’s business model is not well suited to load up with debt as its revenues can be unpredictable. A string of unsuccessful game releases or slow adoption are not a problem but combined with a large debt load, temporary losses could kill this type of company even though it is loaded with high value intellectual property.
Not coincidentally, CEO Robert Kotick owns over $12 million worth of shares. Owner/operator type of CEOs tend to be protective of the downside. If you have a large part of your net worth in a company the last thing you want is to gamble it up with a large debt load. Previously, Vivendi owned a large stake and controlled many seats on the board but with this large shareholder gone, the management team is now more free to do what they think is in the best interest of the minority shareholders. Kotick has served as CEO since 2008 and returns have been satisfactory under his leadership.
Note that he has had to navigate the decline of the incredibly successful World of Warcraft, which is somewhat of an outlier in the gaming industry. Turning out a WoW type of success is not a replicable process one can control from the executive suite. The chart below shows RoIC and RoE over a few years and although RoE could have been a little bit better, RoIC has been admirable. I have confidence Kotick is going to produce for shareholders in the future.
The main risk threatening ATVI's business is that of its powerful franchises that take an important place in gamers life slowly become less popular with players. This may happen due to a slow migration of gamers from ATVI’s titles to those offered by a competitor or because gamers become tired of the formats offered by the company. There are few barriers to entry in the gaming market and ATVI and fresh titles offered by upstarts can woo gamers their way. If competing titles are sufficiently sticky it can be a hard-fought battle to get them back.
When looking at ATVI’s valuation, things get a little bit more tricky. The company is currently rather expensive. An interesting chart which clearly demonstrates this is the one below which shows the historical relationship between ATVI’s share price and its sales. The upper red line shows the highest of ATVI’s P/S recorded multiple compared to its sales and the lower band shows the lowest of ATVI’s recorded P/S multiple compared to its sales level and as you can see the company actual share price is at the higher end of this range:
The company will increasingly experiment with and ways to capture users attention through smartphones and other mobile devices. Historically, mobile devices have not been powerful enough to offer the immersive experiences that are the building blocks of ATVI’s portfolio. Games like hearthstone though are an exploration of that direction. The game is immersive yet can be played on mobile devices. At the same time devices are becoming increasingly interchangeable until there are few differences between nonmobile and mobile devices. That will allow the company to convince gamers to spend even more time in ATVI created worlds and allow for opportunities for the company to generate revenues. ATVI is a promising company that is worth a spot on your watchlist if you are interested in this industry but I am not sure it is worth much more at its current price.
