Activision Blizzard, Inc. (NASDAQ:ATVI) is the world’s leading developer and publisher of online and console (“X-Box,” “PlayStation,” etc.) video games. The game franchises that ATVI owns include Call of Duty, Candy Crush, Destiny, Diablo, Farm Hero, Guitar Hero, Skylanders, StarCraft, and World of Warcraft.
Activision’s titles are among the top-grossing in each of the game genres that the company produces and it owns the number-one subscription-based multi-player game in the world (World of Warcraft).
On its recruiting website, Activision Blizzard defines itself as operating at the intersection of technology, entertainment, and consumer products. Substituting the word “profiting” for “operating” in that statement would be every bit as accurate a way to describe Activision Blizzard, Inc. and ATVI stock.
ATVI stock, since its 1993 restructuring, has gained more than 4,650%.
In the last 12 quarters, Activision stock’s gross revenues have grown at a compound annual growth rate (CAGR) of better than seven percent. In that same time, Activision stock earnings per shares (EPS) have risen at a CAGR of nearly 10.75%. Free cash flow has averaged $315.0 million annually. (Source: “Financial Model,” Activision Blizzard, Inc., last accessed September 30, 2016).
So clearly Activision Blizzard is doing something right, and Activision stock reflects that. The question is how do they do it?
Activision Blizzard makes money in a number of different ways through three operating segments: “Activision,” “Blizzard,” and “King.” The company produces games across a number of genres. My understanding of the three segments is that Activision produces action-adventure games like Call of Duty, Blizzard makes fantasy games like World of WarCraft, and King makes fun cartoon games of skill like Candy Crush.
ATVI Stock: The Deliverables
Activision Blizzard sells video game software in brick-and-mortar stores. The company sells downloads of that same software online from its own websites and through online distributors. Activision delivers video games that can be played across a number of different platforms (personal computers (PCs), game consoles, and mobile devices), and then it charges people to play. The company sells existing customers other downloadable content and services, such as the option to remove ads from a “free” game.
Activision sells existing customers product add-ons that include everything from multi-player content packages to the ability to choose the types of fictional characters that ride into battle. The company sells monthly subscriptions, for which a player can pay an upfront fee for unlimited game time. The free games generate pay-per-click advertising and pay-per-view advertising. And then there are licensing royalties on top of all of that. (Source: “2015 Annual Report,” NASDAQ, February 29, 2016.)
So what does management do to keep Activision stock on its current trajectory?
In my opinion, Activision Blizzard stands to be the primary beneficiary of the expansion of the still-nascent eSports industry. In January, Activision stock closed its acquisition of Major League Gaming, Inc. (MLG), which creates live gaming events and professional gaming competitions and then streams them live to audiences around the world. MLG also runs competitive gaming leagues.
Led by a former ESPN executive, MLG could become the National Football League (NFL) of our future fully-immersed digital lives. And Activision plans to use MLG as the basis for expanding its own “eSports Broadcast Network.” (Source: “Activision Blizzard Acquires the Business of Major League Gaming,” Major League Gaming, , January 4, 2016.)
Why ATVI Stock Can Climb Higher
In my opinion, eSports could very well be the catalyst that carries Activision stock higher for years to come. The industry is growing rapidly and, according to some estimates, could attract an audience larger than NFL football by 2020. The demographic is mostly millennials, the eyeballs of which advertisers can’t wait to get in front of (one report describes them as “an advertising goldmine”). Given that industry revenues could actually triple between now and 2020, eSports looks like it could be a major growth opportunity for Activision Blizzard. (Source: “eSports: Bigger and smaller than you think,” Deloitte Research, last accessed September 30, 2016.)
In my final analysis, ATVI stock could well be one to hold on to for awhile. Activision Blizzard is a company that is all about fun and games, but they’re not fooling around about it.