Will shelter-in-place, mobile release help Activision navigate crisis?

A year ago, gaming giant Activision Blizzard (NASDAQ: ATVI) launched the mobile version of popular gaming franchise Call of Duty with much fanfare, strengthening its foothold in the gaming world. The new revenue source, which lured thousands of new players to the platform since then, has played a crucial role in shielding the business from the virus-induced slump.

In early August, the company’s blockbuster second-quarter outcome catalyzed the stock’s recovery from the selloff triggered by the pandemic a few months ago, and it climbed to an all-time high. But, the shares did not stay there for long as the momentum waned post-earnings and was followed by a volatile phase.

Also read: Activision Blizzard Q2 2020 earnings transcript

When trading ended on Monday, the stock was hovering near $80, which is about 12% below the 52-week high. It is poised to breach the $100-mark in the coming weeks, offering a rare buying opportunity that can generate handsome returns. Almost all market experts are bullish on the prospects of the stock which has gained 31% so far this year, all along outperforming the market. At the current price, the valuation looks just right.

A Safe Bet

Though the rampant insider selling is a negative sign, the stock is relatively less risky, thanks to Activision’s strong fundamentals. The company has nearly halved its debt in the past four years and doubled total cash to $6.4 billion as of the second quarter. The fact that the company’s profit and revenue are growing steadily also makes it an attractive investment option. While being cautious about the deteriorating COVID scenario, the management recently lifted its earnings and revenue outlook for the full fiscal year.

Last week, the company disappointed fans by deferring the release of the World of Warcraft update, citing delays in the testing phase due to the virus-related disruption. But the sentiment improved later when it announced the worldwide release of the sequel to Crash Bandicoot, which is claimed to be the first original adventure in the franchise in about a decade. The popular Call of Duty, an update of which is expected to be out next month, has been a key revenue driver for the company.

Bullish View

The North American gaming market — initially projected to grow at a compound annual rate of about 7% in the next five years — is likely to receive an additional boost from the shift in people’s content consumption behavior. The shelter-in-place orders continue to create tailwinds for Activision as people spend more time on leisure and entertainment, especially online activities, due to the movement restrictions.

Other digital content providers like Netflix (NFLX) and Electronic Arts (EA) also benefited from the COVID-driven spike in user engagement. On the flip side, the shift to remote work within the organization could be a challenge when it comes to iteration and ideation, in the long term.

Obstacles

Underscoring concerns that technological advancement is gradually reducing the shelflife of digital entertainment content, the industry is flooded with new interactive entertainment software and platforms. That makes it essential for companies to remain innovative in content quality, product features, pricing, and compatibility. Activision faces competition from gaming software/hardware makers like Microsoft (MSFT) and Sony Corporation (SNE).

From the Q2 2020 earnings conference call:

“The biggest driver of our year-over-year engagement and financial performance was Call of Duty, which has seen a remarkable increase in its scale as we expanded the franchise across platforms, geographies and business models. As the world starts to reopen, we believe these actions have delivered a true structural change in the trajectory of our largest franchise and this is the roadmap we plan to follow for the many franchises we have in our library which dates back to 1980.”

Strong Finish to 1H

For the stakeholders, there was a lot to cheer about last month when the second-quarter report showed that Activision’s core Digital Online segment expanded in double digits and drove up total revenues to $1.93 billion. The strong top-line growth, which was widespread across all geographical segments, resulted in a 52% jump in net profit to $0.81 per share. Earnings also topped the Street view by a wide margin. The ongoing growth in user addition, especially since the final months of 2019 when the number crossed the 400-million mark, accelerated in the June-quarter.