Shares of Activision Blizzard Inc. (ATVI, Financial) are up more than 70% year to date, and it looks like the impressive rally will not end anytime soon. The video game giant has turned itself into one of the best-performing tech stocks this year, gently hitting an all-time high on the day it reported its second-quarter results.
Activision Blizzard reported better than expected second-quarter results on Aug. 3. For the quarter ended June 30 the video game giant logged earnings per share of 32 cents, surpassing the analysts’ estimate by 16 cents and representing a year-over-year surge of 60%.
Its revenue came in at $1.63 billion, a surge of 4% compared to a year ago. Most important, 80% of its overall revenue came from digital sources. With each passing quarter, revenue from digital sources continues growing at a healthy rate positively impacting the profit margins. This also suggests that the company is not leaning heavily on retail sales of physical game launches or new consoles to drive both top line and bottom line.
Moving ahead, its GAAP operating margin was 21%, and operating cash flows were $265 million. The most significant thing to notice in the second quarter was King’s strong performance. Revenue from King was $480 million, whereas operating income came in at $164 million. Furthermore, it has grown booking per paying user in every quarter of the past two years.
On the other hand, it has had two titles, "Candy Crush Saga" and "Candy Crush Soda Saga," among the top 10 grossing apps for 15 successive quarters. Although King's monthly active user base has declined to 314 million, down from 550 million in first-quarter 2015, it remains a significant revenue source for Activision Blizzard.
Source: Statista
The video game giant publicized that it is making huge efforts to grow King’s user base by developing new content for the community. Furthermore, the company also said that its live ops and new features continue to drive robust engagement.
Moreover, the video game giant is on its way to launching two new popular titles, "Destiny 2" and "Call of Duty: WWI,"Ă‚ in September and November. Also, the company will launch its first-ever PC version of "Destiny 2" in October. The launch of "Destiny 2" could positively impact its margins mainly due to a higher price as well as an expansion pass for gamers to access additional downloadable content.
While the company has not released any game yet this year, both the upcoming games will likely exceed all the expectations. The company’s management has said that a considerable percentage of pre-orders are for pricey deluxe editions.
Apart from this, the company is also betting big on esports. It has entered into a media rights partnership for esports as well as in-game content for its various games. The company sold the first seven teams in its esports Overwatch league for nearly $20 million each.
Source: Newzoo
According to a forecast report from Newzoo, revenue from esports is expected to hit approximately $1.5 billion. Given the healthy outlook of esports, Activision Blizzard looks well positioned to gain enormous benefits in the future.
Summing up
Activision Blizzard has rewarded shareholders with spectacular returns over the past five years. The video game giant delivered strong second-quarter numbers and had its best first half of the year in spite of no new game launches, which is highly impressive.
Despite continuously falling monthly active users, King managed to deliver strong results. The company, though, is putting in a lot of efforts to drive King back to positive user growth.
On the other hand, the game publisher currently trades at a price-earnings (P/E) ratio of 42, making it a bit expensive.
I would recommend that shareholders buy the stock as it still has significant upside potential.
Disclosure: No position in the stocks mentioned in this article.
