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One of the most successful standalone interactive entertainment companies in the world, Activision Blizzard (ATVI), has been growing at a frenetic pace and is poised for success on multiple fronts.
Headquartered in Santa Monica, California, the company’s portfolio includes some of the strongest entertainment franchises, including Activision Publishing, Blizzard Entertainment and King Digital Entertainment, which develop, distribute and publish blockbuster gaming titles like Call of Duty, Warcraft, Starcraft, Diablo and the ever-popular Candy Crush.
The rise of the gaming industry has been swift and unforeseen (by most investors), mainly due to structural changes, societal adoption and technological advances over the last couple of years.
The rise of smartphones and the use of them by, specifically, millennials can take most of the credit for the creation and size of the current gaming industry.
We expect the following growth drivers to continue boosting profits:
1. Mobile
2. Gaming consoles
3. Digital distribution
4. Downloadable content (DLC)
5. Microtransactions
Recent results for the first quarter of the year beat expectations, with significant revenue and earnings per share (EPS) growth. Year-on-year non-GAAP revenue increased 29% to $908m versus expectations of $812m. EPS grew 44% to $0.23.
The expected growth in mobile, through the acquisition of King Digital, is starting to bear fruit – mobile now contributes 26% of revenues versus 12% a year earlier.
This has been a large focus as mobile games have a smaller time commitment than other conventional PC and console games, and are also more affordable to the average person.
Cheaper games equate to a large volume of users in a market that is yet to be fully unlocked. It is important to note that the overall gaming market is growing at a steady pace, and although mobile is cannibalistic, it is bringing new casual users into the industry.
Apart from its recent push to mobile, ATVI has been proactive in addressing the opportunity of the latest craze, eSports. eSports are large events where teams/players play against one another in front of a crowd.
These events are viewed as engagement drivers, drawing millions of online viewers, and sells out large stadiums like Madison Square Garden.
The more people watch these events, the more they want to become involved, spurring on more engagement and more revenue generation potential. eSports are thus seen as indirect revenue generation opportunities.
All the growth drivers mentioned create a “synthetic subscription service”. Historically the revenue model was singularly transactional, as a game was bought and played, with no other transactions taking place in-between game releases. This created cyclicality, which was not ideal.
Now, digital distributions and DLC are driving easier transactions, but these are no longer singular as the transactions and “add-on services” become more frequent. The cyclicality factor is also smoothed out, creating more consistent revenue streams and better profit margins.
The share has had a tremendous run over the last year and currently trades at an expected forward price-to-earnings ratio (P/E) of 16.7 times.
Given that growth is expected to remain between 20% and 30%, this multiple doesn’t seem too steep and should reward investors handsomely over the long term.
This article originally appeared in the 26 May 2016 edition of finweek. Buy and download the magazine here.
