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Activision Blizzard - record Q4 bookings, MS deal still in play

Activision Blizzard's revenues for the fourth quarter were up 8% to $2.3bn.

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Activision Blizzard's revenues for the fourth quarter were up 8% to $2.3bn. The headline net bookings figure which includes orders received for future periods, were up 43% to $3.6bn, a record figure for the company.

Operating profits were down sharply from $682m to $368m reflecting cost increases across all areas of spending. The largest increases were seen in product development and general/admin costs.

Free cash flow for the year was down by 9% to $2.1bn. Net cash at the period end was about $8.4bn.

Microsoft and Activision continue to engage with regulators reviewing Microsoft's proposed $95 per share takeover. Both parties are working towards completion by June 30 2023, subject to obtaining required regulatory approvals.

The shares were up 1.7% in after-hours trading.

View the latest Activision share price and how to deal

Our View

Microsoft's proposed $95 per share cash takeover of Activision Blizzard is at a premium of over 30% to the group's valuation, reflecting serious concerns that the deal may not be approved. Current attitudes towards the stock rest quite heavily on the transaction going through. But with multiple regulators reviewing the transaction, it's not a done deal.

We can understand Microsoft's bid. The group's swooping in to grab some of the world's most valuable gaming intellectual property, at a time when Activision's shares have suffered after allegations of unsavoury management behaviour and corporate culture. The gaming industry is enjoying huge popularity, and this is only expected to grow. But until there's a signature on the dotted line, we must judge Activision on its own merits.

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. World of Warcraft has consistently proven its popularity since its release, and Candy Crush remains among the most lucrative mobile games in the US. Plus, the majority of sales are digital, which is a high-margin source of revenue.

Unlike some rivals, Activision Blizzard owns its most powerful brands outright, so 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 esports expansions.

Esports see professional gamers compete live, with fans watching on TV, online or in stadiums. Audiences are now over 500 million globally. Activision's got experience in the space with the Overwatch League. The 2022 playoffs were one of the most watched events in the tournament's history, having attracted a peak of 397,000 viewers. That excluded the usually enormous Chinese audience which can be in the millions.

Millennials are a difficult group for marketeers to reach, since they consume less traditional media than older generations. But the advent of interactive social media means that when this demographic does interact with media, engagement levels can be higher. That makes esports attractive to advertisers, and advertising revenue can be high margin.

Gaming is going through significant change though, 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 and a large user base.

Activision's recent launches have helped to underpin a return to growth in user numbers. This, alongside an impressive increase in business activity at the end of 2022, gives us confidence that consensus forecasts of double-digit revenue growth in 2023 are achievable. But in the short term, the Microsoft deal is likely to remain the biggest driver of sentiment. Given the high level of scrutiny it is receiving we do see some downside risk.

Activision Blizzard key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th February 2023