Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ATVI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More…)
Activision Blizzard (ATVI) will deliver its Q3 earnings results on Wednesday, November 7th, 2012, after the bell rings. Best known for blockbuster hits like World of Warcraft and StarCraft, Activision Blizzard has beaten expectations 5 quarters in a row. One giant factor that has been looming over the stock is the 61% stake in Activision by French telecommunication company, Vivendi (VIVEF.PK). Last quarter the Street expected EPS earnings of 12 cents a share and the company delivered 20 cents. Revenues on non-GAAP basis skyrocketed 50% YoY to $1.05 billion last quarter, easily meeting the $800 million expected.
This unsuspected surge can be mostly credited to Diablo 3 smashing all PC game sales records by selling over 10 million copies in only one and a half months. I suspect Diablo also sold well from July to September. The Real-Money Auction House (which we have yet to see any number from) was delayed about a month and the reviews were overall positive, despite initial player backlash about the game’s lack of an “end-game.” The game’s developer, Blizzard, is notorious for directly responding to fan criticism and has since released numerous hefty patches since launch that add end-game material such as Monster Power, Paragon Levels, and much more. Many readers of this article might not be gamers so I don’t want to get too much into what these patches actually translate to in the game, but rest assured they add hundreds of extra hours of rewarded game-play that will keep the player coming back for more. Additionally, the most anticipated upcoming addition to Diablo 3, the Player vs. Player Mode (PvP), is still being developed and is scheduled to be released at the end of the year, but will likely be delayed to early 2013. PvP is one of the main reasons World of Warcraft still remains popular today. A hoard of players who have quit since launch will likely return to try out PvP.
For the third quarter, Activision expects non-GAAP earnings of 7 cents per share on revenues of $690 million. Estimates by analysts have moved up slightly over the past couple months, but in the past 30 days none of the 5 analysts covering ATVI have revised their estimates. With 2.7 million copies of World of Warcraft: Mists of Pandaria sold in the first week and subscription count back up to above 10 million again, I think it’s very possible to see ATVI beat estimates a 6th quarter in a row. As I write this on the 4th of November, only first week sales of Mists of Pandaria have been released (Sept 25th release in USA and Oct 2 in China). Only a few days of US sales made it into Q3 report. The 2.7 million doesn’t include digital sales (which have been growing over time) and most importantly, sales in China, which was obviously the target demographic for this latest expansion.
The new Skylanders franchise, which is geared towards younger gamers, was the best-selling game (40 million sold since last October) of the first half of the year and its toy sales exceeded even Star Wars action figures. Two new Skylanders games are going to be released simultaneously on Apple’s (AAPL) iOS in the 4th quarter on a brand new mobile-social gaming platform called Activate. Not many details are currently known about this platform except that you will log in with Facebook (FB) credentials to view your friend list and it will allow for cloud storage, meaning you can access your game state on your iPhone or your iPad Mini. In August, ATVI opened The Blast Furnace, its first in-house mobile gaming studio which is purely dedicated to mobile games. The UK based studio is led by former Rockstar Leeds (Grand Theft Auto makers) president, Gordon Hall. Pitfall! has already been released on iOS and I expect many more mobile titles in the future to compete with other social gaming companies like Zynga (ZNGA) and OpenFeint.
Activision Blizzard recently hit a new 52-week low last Friday (October 26th) and has slowly started to crawl its way up off that support level. If the company does indeed beat expectations, which would be against what some of the recent Put activity has been implying, I believe ATVI will likely see a big rally into 2013. Call of Duty: Black Ops 2 will be the foundation of this uptrend. Pre-order sales are just a tad under what Modern Warfare 3 was around this time last year (1.8 million for Xbox 360 vs 2.4 million for MW3 a year ago and 1.0 million on PS3 vs. 1.0 million on PS3 for MW3 a year ago). If you’ve seen the new Live Action TV spot for Black Ops 2 featuring Robert Downey Jr that started airing this week or have heard of the highly popular game-mode called “Zombies” which wasn’t part of Modern Warfare 3, then you know there is much more to be desired here than there was a year ago.
I am very confident that the game experience will speak for itself once the game is released and even if Day 1 sales don’t break MW3′s record, Week 1 and Month 1 sales likely will. Pessimists will say the game is a virtual copy year after year. In reality, next week’s release will contain an entire game mode (Zombies) that was so popular in Black Ops 1, it probably could have been sold as its own game this time around and people would buy both. Black Ops 2 developer, Treyarch, has also had an intense focus on E-sports this time around. E-sports, or competitive video game playing, is mostly run by games like Halo, League of Legends, Dota, and Blizzard’s own StarCraft 2, but now Black Ops 2 is going to be on the big stage as well. Moreover, Activision is partnering with Tencent (TCEHY.PK) to bring Call of Duty to China for free in early 2013.
If the company doesn’t beat expectations on Wednesday, we might briefly see a new 52-week low followed by a definite spike in the following weeks with Black Ops 2 releasing on November 13th. Other factors looking forward into 2013 is the first StarCraft 2 expansion pack, Heart of the Swarm, which is currently in beta testing and the eventual FPS currently called Destiny, which is being made by Halo creators, Bungie. It is also likely that Activision Blizzard will announce Titan sometime in 2013. Titan is a very secretive MMO that’s been in production by Blizzard for several years and all we really know at this point is that the company has spent tens of millions on RD and is getting the best talent in the industry to work on it. Blizzard has stated in the past it will not be a successor to World of Warcraft and judging from a leaked timeline from 2010, it won’t be released until at least Q4 2012, but much more likely sometime in late 2014.
To put Q4 into perspective for you one last way, just remember that Modern Warfare 3 was described as the biggest entertainment launch ever, selling 6.5 million copies in 24 hours, and beating Avatar’s record for the fasted selling piece of entertainment. After next week’s release, the Call of Duty franchise will become the most valuable entertainment property worldwide, overtaking Harry Potter/Star Wars. Activision Blizzard has a much more promising lineup than competitors like EA (EA) and THQ (THQI) over the next year and it continues to push the envelope of what’s possible in a game. The coming weeks will be a pivotal time in ATVI’s history and I encourage everyone to do their due diligence before making any investing decisions. As we head into the holiday season, one might want to look at an options play coinciding with Q4 earnings or if you’re a long-term investor, you would have Titan in mind, and would be looking at Jan 2015 LEAPS. Activision Blizzard pays an annual dividend of 18 cents a share, has a trailing P/E of 16.03, and has no debt.