Why Activision Blizzard, Inc. Shares Are Leaping

A look behind the game publisher's blockbuster first-quarter results.

May 7, 2014 at 12:30PM

There was plenty for investors to like about the earnings results that Activision Blizzard (NASDAQ:ATVI) just posted. Let's start with the big picture: Profit came in ahead of expectations, setting a new quarterly record of $0.19 a share. Sales also surprised to the upside at $772 million -- 14% ahead of the game publisher's prior forecast.

Hearthstone Logo

Source: Activision Blizzard.

The company can thank three Blizzard franchises for that outperformance: World of Warcraft and Diablo titles sold well, and a brand-new free-to-play game, Hearthstone: Heroes of Warcraft, made a quick contribution by attracting 10 million registered players. That trifecta led to a surge in digital sales, up to a record 68% of revenue. Because online sales tend to pack a bigger profit punch, Activision was able to set a new Q1 record for operating margin at 31.1%.

But investing is about the future, not the past, and that's what should have shareholders really excited. 

Warcraft has still got it
To start with, Activision's aging World of Warcraft franchise has at least one more hit left in its tank. Fresh WoW content is due to hit shelves later this year, and it's already one of the fastest-selling expansions in franchise history, the company says, with over 1 million pre-sales booked to date. 

Yes, Warcraft's subscriber base shrunk again this quarter, dipping to 7.6 million from 7.8 million three months ago. But that's to be expected as we approach a new expansion. The brand is anything but dead. In fact, Activision just expanded WoW's development team with the aim of raising content quality and delivering new content to subscribers at an even quicker pace. 

Two games, seven years in the making  
Call of Duty is also set to keep dominating despite its age. The franchise led all brands as the top seller on the Xbox 360 and PS3 consoles. And the latest chapter, Ghosts, has so far kept that streak alive as the best-selling title on both the Xbox One and PS4 devices. 

Ghosts

Source: Activision Blizzard.

This year's installment could do even better. Advanced Warfare is the first Call of Duty title yet to benefit from three years of development, which should allow for more bold innovations and a much higher level of polish. At the very least, it won't have the type of buggy launch that has plagued other recent launches. Gamers -- and investors -- can look forward to new details on this title coming out at next month's E3 conference.

Activision's portfolio isn't relying on just established franchises, though. In addition to Hearthstone, the company is rolling the dice on a massive new property. Destiny has been in development for four years and is on track to be the biggest launch of a new franchise in history when it's released in early September. 

A temporary squeeze
Activision's second-quarter results should be hurt by the timing of that launch. The company plans to spend lots of cash to support Destiny's debut, which is a big reason why profits are expected to plummet to $0.01 a share from the $0.22 the company booked in last year's Q2. Still, that investment should be well worth it considering that Activision has plans for the franchise that stretch out into the next decade.

More amazing technology
Activision's Hearthstone is dominating the download charts on Apple's iPad. And if you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool recommends and 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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