Activision Blizzard: Console Sales and Smart Strategies Are Long-Term Drivers

Activision is off to a good start and a variety of factors should lead to long-term outperformance.

Mar 31, 2014 at 11:00PM

Activision Blizzard's (NASDAQ:ATVI) performance as an independent company has been outstanding, so far. Its buyout of Vivendi resulted in significant earnings accretion and gave Activision more freedom to develop better games and compete against the likes of Electronic Arts (NASDAQ:EA). What stands out is the fact that Activision's shares have gained 20% since Vivendi's exit. With new console sales coming in above expectations, Activision could do better in the future.

Industry leading position
Activision's Call of Duty: Ghosts was the No. 1 game across all platforms and the No. 1 next-generation game on PS4 and Xbox in North America and Europe last quarter. In addition, Skylanders was once again the best-selling children's franchise, including toys and accessories sold in North America and Europe.

Blizzard Entertainment's StarCraft II: Heart of the Swarm was the No. 1 PC title in North America in 2013. After the record-breaking success of Diablo III on PC, it was the first Blizzard game to come to console in more than a decade when it launched on the Xbox 360 and PS3 in 2013. Diablo III ended the year with over 15 million units  sold cumulatively across all platforms, and the launch of the Diablo III PC expansion pack this month could bring more gamers into Activision's fold.

Console boost
The next-generation consoles have been successful as Sony's PlayStation 4 and Microsoft's Xbox One have hit 10 million units in combined sales. This has set up third-party game publishers for a grand slam 2014, and Activision Blizzard has many tailwinds going forward. The new console generation delivers faster processing and better graphics, increasing gamer interest.

It also brings improvements to online gaming capabilities such as same-day downloads, improved social features, and new opportunities for potentially higher-margin business models like the sale of virtual items and downloadable content. As a result, Activision can see more revenue in the future due to these new features.

Looking ahead, new consoles should be catalysts for revenue growth and margin expansion. The growth in the consoles' install base over the next few years will also give Activision good opportunity to capitalize on a rapidly expanding gaming population, along with broader international penetration.

Game pipeline and strategies
Activision's free-to-play games, including Hearthstone: Heroes of Warcraft, Blizzard's Heroes of the Storm, and Call of Duty Online are designed to appeal to players across numerous platforms and geographies. These investments are expected to result in solid returns as players progress through stages and buy items.

Activision is also pushing into the freemium game segment. Blizzard has announced that Hearthstone: Heroes of Warcraft, its free-to-play digital card game, is now officially out of beta and fully released. Although Hearthstone doesn't require any upfront payment to get started, it demands small payments from users who want to speed up their progress.

Activision will also be launching Heroes of the Storm, which brings together the iconic characters from Activision's three famous franchises: StarCraft, Diablo, and Warcraft. The game has huge potential and resembles Riot Games' League of Legends, which had 27 million daily active players.  

Activision is also extremely confident about Destiny, which is due to be launched in September.  Bobby Kotick, Activision's chief executive, claimed that Destiny will be the "best-selling new video game IP in history" and will definitely hit the billion-dollar mark in sales. Destiny will compete against Electronic Arts' Titanfall. However, since Titanfall is exclusive to Microsoft's platforms, Destiny already has a competitive advantage due to its cross-platform presence.

Activision might not enjoy this advantage for long, however, since Electronic Arts isn't going to keep the Titanfall sequel exclusive to Microsoft's platform. Titanfall's developing studio, Respawn Entertainment, had aims of developing games for the PS4 as well. So, Electronic Arts, the game's publisher, will have a wider audience next time.

Bottom line
Activision is carrying good momentum into the future, helped by new consoles and new games. It is increasing its penetration with strategies like free-to-play games and more blockbuster franchises, which makes it a good long-term option to benefit from the gaming industry.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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