Tuesday, May 19, 2015

Recent Buy: Activision Blizzard (Nasdaq: ATVI)


Introduction
I would say that until about a year ago, I often pictured gaming as an activity dominated by millennial males spending their days and/or nights staring at the their television screen, remote control in hand, fully escaping reality. However, after further observation, I have come to the conclusion that gaming actually takes on different forms covering a wide range of demographics. 
I am not a gamer by any means and to be quite honest, the way in which some people choose to spend every waking moment of their day playing games can be quite concerning. Isn't there more to life? Nonetheless, instead of judging others for how they choose to spend their time here on earth, I realized that perhaps I should just consider investing in this phenomenon, and so that's exactly what I've done.
The Gaming Industry
According to a recent study conducted by PWC on global entertainment and media,  revenue within Global mobile games is forecast to reach US $15 billion by year 2018. Rising at a compounded annual growth rate (CAGR) of 9.6% Key markets for this growth are currently the U.S, China, and Japan. The rapid increase in the ownership of smartphone is playing a pivotal role when it comes to increasing access to mobile games globally.
New innovations and developments within the console game industry, is expected to renew and strengthen the customer interest in this area. Global console game revenue is expected to reach US $31.9 billion in 2018, a CAGR of 4.9%. Digital is also set to experience solid growth- it is estimated that by 2018, digital will account for 37% of global console game revenue. An increase of 23% in comparison to 2013. 
The Company: Activision Blizzard
The business of Activision Blizzard (NASDAQ: ATVI) includes but is not limited to-developing and publishing games worldwide for video game consoles, mobile phones, hand held devices, personal computers (PCs), and tablets. The products are developed and published through retail channels or digital downloads and downloadable content to a range of gamers. It also publishes online subscription-based games in the MMORPG category (Massively Multi-player Online Role-Playing Game) as well as real-time strategy and role-playing games.


Most popular games owned by Activision Blizzard include: Call of Duty, Destiny, Skylanders, Guitar Hero, World of WarCraft, Diablo, HearthStone, and StarCraft.
First Quarter 2015 Results
On May 6th, 2015 the company reported earnings for first quarter of year ending March 31st 2015. The company reported quite strong year over year increases in almost every metric including the following:
  • Comprehensive net revenue (GAAP) of $1.28 Billion V. $1.11 billion reported during first quarter 2014.
  • Net revenue from digital channels (GAAP) came in at $581 million- a record result, and represented 45% of the company's total revenue for first quarter 2015. During first quarter 2014, GAAP net revenue from digital channels represented 36% of company's total revenue.
  • GAAP Earnings per Share reached a record $0.53, a 32.5% increase from the $0.40 reported during first quarter 2014.
  • As reported by CEO Bobby Kotick, for the last 12 months ending March 31st, 2015, the company has reached a user base of over 150 million users around the world, hours played increased by 12 billion, and company recorded 25%+ growth within the Activision Blizzard gamers community.
  • Another great accomplishment for the quarter was being named as one of the 100 best companies to work for in 2015 by Fortune Magazine.
  • Revenue outlook for year 2015 was increased to $4.425 billion, and earnings per share to $1.20.

Reported highlights for most popular games and divisions:
  • Destiny & Hearth Stones- Heroes of WarCraft: 50 million registered players as of quarter ending March 31st, 2015. This specific division has added nearly $1 billion in non-GAAP revenue from time of inception.
  • World of WarCraft expected declines: The Company did acknowledge that as expected, subscription for World of WarCraft now has 7.1 million subscribers (a 6.57% decrease from the 7.6 million subscribers the game had at end of first quarter 2014). However, the game still remains the number 1 subscription based MMORPG in the world.
  • Call of Duty- Advanced Warfare: This remains the number one title since its launch (six months, at time of reporting). Skylander- also the #1 console franchise and title globally during first quarter of 2015, the number one kids console franchise title globally.

*In January of this year, Call of Duty Online opened Beta in China, the world's largest gaming market. The beta is being done in partnership with Tencent (OTC: OTCPK:TCEHY). This represents a huge opportunity as ATVI continues efforts to expand around the world. 
  • Blizzard Entertainment: During first quarter of 2015, this entity reached the largest player community in its history, up a double digit percentage year to date despite no major launches during the quarter.

Valuation
It can be argued that the company is not cheap. Five year MA P/E is 27.6, while current P/E stands at 19.8. However, when I look at valuation numbers I also take a look at a company's prospects for ongoing growth and expansion within their respective industry. I often find that a high valuation can be a signs of a company that is in the middle of an aggressive growth phase and numbers should justify themselves over time. 
Not only does ATVI have a portfolio of games that are leaders around the world, but is also looking to enter markets with massive potential, such as China, as mentioned. If the beta turns out successful, the company's ability to reach more customers can be immense. Same situation applies as they look to enter additional untapped markets.
As of the date of this post, the stock trades at $25.47 per share and pays an annual dividend of 0.90%, or $0.23 per share.
Final Thoughts
I started a small position in the stock about 3 weeks ago and is already up over 2%. As a long term investor, I plan to hold my shares indefinitely and keeping a close eye on the following:
  • Company continues to grow internationally and continues to maintain leadership status within the gaming industry (keeping an eye in developments within the China market and beyond).
  • Performance of leader games such as Call of Duty, and Guitar Hero (which recently made a revamped return), and new developments continue strong in terms of revenue growth and margins. In the case of World of WarCraft, I'd like to see what strategy(ies) the company implements to make up for the loss of subscribers.
  • Keeping a close eye on overall year over year metrics where it comes to income, revenue, margins, debt, growth, and ongoing plans to remain competitive within a competitive industry.

Thank you for reading.
Tell me, are you a fan of games? Which other stocks within the gaming industry do you feel are also worth a look?