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Activision Blizzard - profits up, Co-Leader leaving

Sophie Lund-Yates, Equity Analyst | 3 November 2021 | A A A
Activision Blizzard - profits up, Co-Leader leaving

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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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Total revenue rose 5.9% to $2.1bn in the third quarter, as the number of monthly active users (MAUs) remained flat, despite last year's elevated levels. The group saw user growth in two of the three business divisions, but Activision declined year-on-year.

Operating profit rose 5.9% to $824m.

The shares fell 10.9% in after-hours trading.

View the latest Activision share price and how to deal

Our View

The pandemic steam-rolled Activision Blizzard onto a path of impressive growth. Stay at home orders boosted demand for the Call of Duty maker's content. We suspect the market's a bit disappointed by growth forecasts from here, but that's a function of the formidable results this time last year.

Crucially, user numbers are still holding their own.

That's testament to the brand's incredible pulling power. On top of the infamously popular Call of Duty franchise, World of Warcraft continues to top lists of the best games in its genre 17 years after it was released, and Candy Crush remains among the most lucrative mobile games in the US. Activision Blizzard's intellectual property is formidable.

Legions of devoted fans spend big on expansions and in-game items - so unlike the days when gamers bought a single disk or cartridge upfront, established hits can keep on generating cash. Roughly 40% of all revenue in the last quarter came from in-game spending, and 88% of sales were digital. Digital sales should be higher margin, and help explain why profit margins have increased from 30.3% in 2011 to over 41% today.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so it doesn't have to share success with licence holders. That's allowed the group to rapidly expand its brands into new formats and underpins planned esport expansions.

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 fourth season, with 2020's grand finals attracting 1.6m 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. Meanwhile news that the King mobile gaming business has managed to grow advertising revenues even as other digital advertisers struggle is encouraging.

However, the group has recently faced serious allegations about its employment practices and corporate culture. This threatens future recruitment of key development staff and retention of current talent. The reputational damage also risks spilling over into sales in an increasingly competitive market. How destructive the episode proves will depend on whether management are seen to handle the complaints fairly and efficiently from here.

This is happening at a time when gaming is going through significant change, with consoles giving way to cloud-based gaming and the marketplace 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. However, a premium catalogue of games comes with a premium price tag. Even after a fall in valuation associated with the recent reputational damage, the shares trade on a PE ratio of 18.2 times earnings.

Activision Blizzard key facts

  • Price/Earnings ratio: 18.2
  • 10 year average Price/Earnings ratio: 19.7
  • Prospective dividend yield (next 12 months): 0.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter results

Activision revenue fell compared to last year, because of the non-repeat of Tony Hawk's popular releases, as well as the effect of stay at home orders in 2020. The division had 119m MAUs, with Call of Duty MAUs remaining "consistent".

Blizzard revenue grew 20%, driven by the launch of Diablo II: Resurrected. Blizzard had 26 million MAUs in the third quarter. The group said: "World of Warcraft is on track to deliver its strongest engagement and net bookings outside of a Modern expansion year in a decade."

"Very strong" trends in in-app purchases and advertising helped King revenue rise 22% - a quarterly record. There were 245m MAUs, and Candy Crush performed well.

Total operating costs rose slightly to $1.2bn, with a 20.1% increase in Product Development costs.

Free cash flow in the quarter was $498m, up from $172m a year ago. Activision had net cash of $6.1bn at the end of September versus $5.0bn at the start of the year.

Looking ahead, the group expects net revenue of $2.0bn in the fourth quarter.

Find out more about Activision Blizzard shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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