Activision’s growth is set to outlast the pandemic – The Australian Financial Review

Posted: May 21, 2020 at 2:42 pm

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US video game publisher Activision Blizzard has benefited from a 'stay-at-home' thematic driven by lockdowns and its growth is set to go beyond the virus crisis.

Shares of video game publisher and developer Activision Blizzard have been strong in recent months, which is not surprising given the stay-at-home theme during the global lockdown.

This has made consumers flock to entertainment that can be consumed in their own homes and gaming has certainly been high on the list.

Activision's Call of Duty, which is one of the best-selling video game franchises in history.Activision

We covered the stocks in this column a few years ago, and they have been quite literally a strong "play" since. The shares have hit their highest levels since October 2018 as the companys recently released quarterly numbers beat already-elevated expectations.

Activisions high-quality video game franchises have seen increased engagement from gamers during the lockdowns. Adjusted revenue of $US1.52 billion ($2.32 billion) easily topped the $US1.32 billion expected.

Quarterly net income hit $US505 million, or 65 a share, up from $US447 million and 58 a share in the year-earlier period. Excluding certain items, non-GAAP earnings per share came in at 76 a share, double the 38 a share consensus estimate.

The companys new free-to-play "battle royale" entry, Warzone, from the popular Call of Duty franchise, has recorded an impressive 60 million players so far.

Activision lifted its 2020 adjusted revenue forecast to $US6.9 billion from $US6.73 billion and forecast full-year adjusted earnings of $US2.62 a share, which compares well with the $US2.48 that had been expected.

The video game industry is enjoying secular growth and the stay-at-home restrictions have had increased engagement that is likely to persist even when restrictions are eased.

We note that a big positive for the company was discussed on the earnings call, with the companys developers still on track to release a new Call of Duty (CoD) game this year despite some interruption from COVID-19.

Call of Duty is one of the best-selling video game franchises in history and regularly tops the charts for console game sales each year. Activision has multiple developers working on Call of Duty titles to enable this feat, as typically a game would be in development for a few years.

By "rolling" across development teams, Call of Duty fans can get their "fix" each year. Releasing a new title later this year is a big positive and we continue to view the company favourably.

We believe CoD: Warzone could also be a game-changer for Activision, with its free-to-play model potentially generating more revenue than the traditional video game model, which generally charges an upfront cost (that is, when gamers buy the game).

With the free-to-play model, Activision will focus on charging fees for in-game costumes and content. This has been enormously successful when gamer engagement is high. Note that other free-to-play rivals like Fortnite reportedly generated $US1.8 billion in revenue in 2019.

We also believe Activision will make more headway in Asia, specifically in China. The company has been increasing its focus on that huge market opportunity, partly because of COVID-19.

App Annie data shows that game downloads surged 80 per cent year-on-year in the first three weeks of February. Activision has a larger exposure to Asia than its two big peers at 14 per cent of revenues and the surge in stay-at-home cases in Asia should lead to growth in this arena.

We see this growth continuing after the lockdowns and even as stay-at-home restrictions are eased. Gaming, like many others, is a "hard habit to break", as they say.

Disclosure: Interests associated with Fat Prophets hold shares in Activision Blizzard.

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Activision's growth is set to outlast the pandemic - The Australian Financial Review

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May 21st, 2020 at 2:42 pm