Activision Blizzard: An All-Around Video Game Publisher

So far in 2017, video game publishers have been enjoying an incredible rise in their stock price, fueling this year’s outstanding performance of the Nasdaq index. The big players, Electronic Arts, Take-Two Interactive Software, and Activision Blizzard all showed a solid double-digit growth since January. So it doesn’t surprise me to see so much hype around them. At some point, I, too, got interested in figuring out if there’s any substantial merit to such optimistic valuations.

In one of the previous posts, I wrote about my preference for investing in companies only after experiencing their products. Well, I’m not a big video game guy. A few years ago I purchased PS4 with the idea of playing FIFA on it. To this day, it is still the main reason for me to keep this console. Having never played the big game franchises of Activision Blizzard like Overwatch and Destiny, naturally, I should have pursued the likes of Electronic Arts — the owner of FIFA franchise. But let’s separate work and leisure, and focus on determining the best stock, and not the best game (because we all know it’s FIFA, right?!).

Of all the aforementioned video game publishers I decided to take a closer look at Activision Blizzard due to an interesting factor that, in all honesty, sounded a bit odd to me (first signs of getting old) — eSports. According to a market research company Newzoo, the term eSports is defined as:

Competitive gaming in an organized format; an event or league, organized by a third party, with a specific goal (i.e. winning a tournament or prize money), with a clear distinction between players and teams who are competing against each other for a chance to reach that goal.

So, apparently, there are a lot of people interested in watching eSports events. Like, actually turning their laptops and watching people play games online type of interested. Like, purchasing a ticket and going to a stadium to see their players live type of interested. Numbers don’t lie — in 2016 the total revenue of the industry amounted to about half a billion dollars, with the audience of 323 million people. By 2020 it is predicted to reach $1.48 billion revenue and the audience of 589 million (estimate by Newzoo).

Source: Newzoo

Back in 2016, envisioning the potential growth of this industry, Activision Blizzard purchased Major League Gaming (MLG), that instantly provided them a platform for broadcasting as well as a proven tournament structure to build on. So now Activision Blizzard is building a professional “Overwatch” eSports league, where city-based teams will compete in global tournaments. The owner of the Boston team, who is also the owner of New England Patriots, Robert Kraft, in an interview said that he sees eSports as a great opportunity to appeal to Generation Z and Millenials. With such a good platform and big investors, that at the time of the writing together represent seven teams in seven cities around the world, the pace of growth of the industry has good chances to increase.

The gaming league is going to be more meaningful to the company in the future, whereas right now the main drivers of the success are the sales of the games as well as the in-game revenue. The latter, actually, has been a significant driver of the stock prices, as the companies across the industry have mastered this way of extending monetization window of their products. Downloadable content, a multiplayer option, expansion packs, in-game currency have all been positively impacting the bottom line, as the profit margin is much higher for these type of products. Activision Blizzard generated $3.6 billion revenue from in-game sales in 2016, a 126% increase from the annual report of 2015. Such jump made it the main revenue source, accounting for 54% of total revenue, surpassing actual game sales. Their success in extending the life of multi-billion-dollar game franchises by keeping current players interested for several years ensures a bright future for the company.

Source: Newzoo

Unlike some of the video game competitors, Activision Blizzard has been taking serious steps in diversifying their portfolio of products. Back in 2016, they have tapped into a fast growing mobile market by acquiring King Digital, the maker of Candy Crush. At the time of the deal, King Digital had a game social network of over half a billion players. This deal will allow Activision Blizzard to establish its position in a very attractive market with a promising potential for growth.

The Biggest Products in Activision Blizzard Portfolio. Source: Q2 2017 Financial Results

P/E is in line with the industry, around 40, which may pose a concern whether it is a good time to get into the company. However, with a trend of shrinking liabilities, increasing in-game revenues, and the outstanding growth of Overwatch, the company seems to yet reach its peak.

For similar articles on investing, please follow our blog, Quarter Invest. Contributor and co-founder of Quarter Invest — Serghei Trofimov.