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Activision Blizzard - Sound 2018, but work to do

Nicholas Hyett | 13 February 2019 | A A A
Activision Blizzard - Sound 2018, but work to do

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Activision Blizzard Inc Com Stk USD0.0000

Sell: 60.60 | Buy: 60.66 | Change -0.29 (-0.48%)
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Activision's fourth quarter bookings were up 7.6% year-on-year although still slightly behind market expectations, at $2.8bn. Earnings per share were broadly in line with what analysts had expected.

Guidance for 2019 is conservative, reflecting the lack of any major releases during the year.

The shares rose 3.4% in pre-market trading.

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Our View

The gaming giants are going through a serious shakeup at the moment, and Activision isn't immune. Combined with the loss of its CFO and end of a publishing agreement with developer Bungie, that's seen Activision's price to earnings ratio fall from 25 to 16.2 in just 6 months. We still think it's got long-run appeal though, and picked it as one of our five shares to watch in 2019.

Global gaming spend is expected to hit $148bn in 2019. And with 2.3bn gamers worldwide, it's a very attractive market.

Activision's Call of Duty, World of Warcraft and Candy Crush, are among the most successful gaming franchises going. And, along with Overwatch, they accounted for $4.7bn of revenue in 2017.

We particularly like the mix of console, PC and mobile gaming. In a rapidly changing industry the group has fingers in every pie, and that's delivered profit growth of 8.2% a year since 2008. Profits are being ploughed back into the business for now - with a negligible dividend yield of 0.9%.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn't have to share success with licence holders. The group's looking to make the most of that through the development of esports.

esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences have been growing - up 17.8% last year.

Call of Duty's position as the world's most popular console game makes a successful league based on the game the Holy Grail, but it's still early days on that front. However, Activision's Major League Gaming is a leading organiser of events, including the recently launched Overwatch League. The grand finals attracted millions of online viewers, 70% of whom fall in the 18-34 year old age bracket.

Millennials are a difficult group for marketing teams to reach, since they consume less traditional media than older generations. That makes esports attractive to advertisers.

A possible concern is in-game purchases, which have attracted some very negative press. Some see 'loot-boxes', where players pay for a randomly generated in-game benefit, as a gateway to gambling for children, and regulators have started to take note.

Fortunately Activision is less exposed than some rivals, and its biggest titles target adults in any case. A regulatory crack down would still see the shares stumble, but for the patient investor, we think Activision Blizzard could represent a long-term opportunity.

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Fourth quarter and full year results

Full year bookings rose 1.4% to $7.3bn, with digital bookings up 5.3% and record in-game bookings of $4.2bn.

The Activision division saw revenues rise 6% in the fourth quarter, as Monthly Active Users (MAUs) increased to 53m. Operating profits in the quarter increased 14% to $723m. The strong results were driven by the launch of Call of Duty: Black Ops 4, which was the number one selling console franchise during the year. Almost 40% of sales came from full-game downloads.

Blizzard MAUs declined slightly to 35 million, as the expansion boost to World of Warcraft users faded. Fourth quarter revenue grew 15%, with operating profits up 51% to $241m.

Mobile gaming division King saw MAUs increase to 268m following the launch of Candy Crush Friends Saga. Fourth quarter revenue rose 5%, with operating profit up 28% to $207m.

Activision expects to increase investment in its biggest franchises next year, with a 20% increase in the number of developers working on Call of Duty, CandyCrush, Overwatch, Warcraft, Hearthstone and Diablo. The extra investment will be funded by cutting back underperforming projects and wider cost savings.

2019 revenues are expected to be $6bn, substantially below the 2018 number, with earnings per share of $1.18.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.