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Activision Blizzard - Call of Duty Mobile shoots for the stars

Nicholas Hyett, Equity Analyst | 7 February 2020 | A A A
Activision Blizzard - Call of Duty Mobile shoots for the stars

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Activision Blizzard Inc Com Stk USD0.0000

Sell: 80.53 | Buy: 80.57 | Change -0.40 (-0.49%)
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Fourth quarter revenues were 16.6% lower than a year earlier, although still ahead of management expectations. That reflects a particularly strong performance from Activision's 'Call of Duty' franchise following the launch of Call of Duty Mobile. Underlying earnings per share were also ahead of expectation at $0.62.

The company announced a final dividend of $0.41 per share, up 11% year-on-year.

The shares rose 2.4% in early trading.

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Our View

Activision Blizzard brings together some the world's most successful computer game franchises under one roof.

Call of Duty is the world's top selling console franchise, and has been for 10 of the last 11 years. World of Warcraft continues to top lists of the best games in its genre 16 years after it was released and Candy Crush remains among the most lucrative mobile games in the US.

Across all its games Activison attracts 409m users a month and we particularly like the mix of console, PC and mobile gaming. In a rapidly changing industry the group has fingers in every pie and recent innovations have seen the group make the most of its varied portfolio. Profit growth has averaged 7.5% a year since 2008, but that's being ploughed back into the business for now - with a modest dividend yield of 0.7%.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn't have to share success with licence holders.

The benefits of that set-up are most noticeable when it comes to Call of Duty. A mobile version of the game has more than tripled the number of Activision players and, while these are likely to be lower revenue players, if Activision can hold onto them they could be lucrative. A recently launched Call of Duty League means the company's also looking to capitalise on the growing popularity of e-sports.

esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences have been growing and are now over 400 million globally. Activision's got experience in the space with the Overwatch League in its third season with 2019's grand finals attracting 1.1million viewers. In the past 70% of viewers have fallen 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, and advertising revenue can be high margin. We think Call of Duty has the potential to dwarf Overwatch in advertising terms, but it's still early days.

However, for all Activision's past successes it can't afford to rest on its laurels. Gaming is going through significant change, with games consoles giving way to cloud based gaming and the market place getting increasingly crowded. It's possible that the next generation of games consoles will be the last, and change is always more difficult for incumbents. Activision clearly recognises the threat and is increasing investment in its major franchises.

On balance we think the quality of Activision's intellectual property will give it the edge it needs to weather the storm. However, a premium catalogue of games comes at a premium price tag. The shares currently trade on a PE ratio of 23.9 times, more than 30% above the long run average.

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Full Year Results

Activision finished the year with 128m Monthly Active Users (MAUs), up from 36m in September. That reflects double-digit percentage growth in Call of Duty: Modern Warfare (compared to Call of Duty: Black Ops 4) but also 150m downloads of Call of Duty Mobile. The Call of Duty League launched in January, with an exclusive streaming partnership agreed with YouTube.

Blizzard MAUs came in at 32m, with the number of active World of Warcraft players more than doubling between Q2 and the year end. Hearthstone continued to grow net bookings while Overwatch launched on the Nintendo Switch.

Fourth Quarter MAUs hit 249m at King with Candy Crush maintaining its position as the top grossing franchise in the US and advertising net bookings up 80% year-on-year.

Mobile's share of total revenue rose from 29% in 2018 to 34% in 2019. That reflects growth in Call of Duty Mobile as well as lower Console and PC sales.

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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.

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