Here's Why Activision Blizzard Will Get Better

Activision increased its full-year guidance after releasing its recent results, which is no surprise if we take a closer look at it.

May 20, 2014 at 7:30PM

Activision Blizzard (NASDAQ:ATVI) has been impressive in the last few months as its games have clicked with customers. Its first-quarter results also indicate this as the company beat the consensus estimates handsomely and upped its full-year guidance. The company's performance was quite strong despite competition from rival Electronic Arts (NASDAQ:EA), and going forward, Activision should be able to continue its impressive performance. Let's see why.

A strong pipeline to drive growth
Activision Blizzard delivered better-than-expected first-quarter results on the back of strong performances from World of Warcraft, Diablo, and Hearthstone: Heroes of Warcraft. In addition, the launch of the Call of Duty franchise on the new Sony PlayStation 4, or PS4, and Microsoft Xbox One consoles was also successful, with the game becoming the No. 1 franchise on the new platform life-to-date. 

Looking ahead, Activision is working on the next-gen Call of Duty: Advanced Warfare. The company expects this to become the most valuable franchise in the series, driven by cutting-edge graphics, an engaging story, and solid gameplay.

In addition, Skylanders has also performed quite well and is one of the leading franchises in the toys-to-life genre. In the first quarter, Skylanders SWAP Force, including toys and accessories, was the No. 1 franchise in North America and Europe according to management. Activision is looking to build upon the success of the platform through Skylanders Trap Team, which it revealed a few weeks ago.

However, its most anticipated game is Activision Publishing's Destiny, which the company has slated for release on Sept. 9. Activision expects this to become its next $1-billion franchise. The company has spent around $500 million on developing and promoting this game.

World of Warcraft gains some momentum
World of Warcraft seems to be gaining some momentum once again, and this is good news because the game is one of Activision's biggest revenue generators. World of Warcraft is the world's largest subscription-based massively multiplayer online role-playing game and it ended the first quarter with approximately 7.6 million subscribers. 

Activision has now expanded the game's development team to accelerate content delivery, which includes expansions. Activision is trying to raise the quality of gameplay further with the next installment in the series -- Warlords of Draenor. The company has received a good response for this expansion pack already with pre-purchases exceeding 1 million to-date. The company plans to launch the pack later this year, so it can expect a stronger performance from the game as the launch date nears. 

Diablo and Hearthstone: Awaiting better times
Activision's latest titles, Diablo III: Reaper of Souls and Hearthstone: Heroes of Warcraft, have also gotten off to great starts. The Diablo III: Reaper of Souls expansion pack sold through more than 2.7 million copies worldwide in the first week of launch. Moreover, it was at the No. 1 spot in PC games in both North America and Europe during the quarter. As Activision intends to release Diablo for the PS4 later this year, the game's sales could receive a boost once again. 

Additionally, Blizzard launched its new free-to-play game Hearthstone: Heroes of Warcraft on March 11. Hearthstone has already registered more than 10 million PC players across the globe and seen strong engagement and monetization. The company launched the game for the Apple iPad in April, and it quickly occupied the top spot for iPad downloads. It became a top-10 grossing iPad game in several countries, including the United States. Since Blizzard plans to release the game for the iPhone and Google Android phones later this year, its performance should improve further. 

Digital puts in a strong performance
Furthermore, the company is seeing strong revenue from its Battle.net digital platform, primarily driven by the launch of Hearthstone for iPad. It has expanded Battle.net beyond the PC to the fast-growing tablet platform, which looks like a smart move and could help the company drive more revenue going forward. 

It looks like Activision is outpacing rival Electronic Arts' performance with its digital platform. In the first quarter, Activision generated a record 68% of its total sales from the digital channel. In comparison, Electronic Arts generated just 45% of its total revenue from digital sales. In addition, Activision's financial performance was way better than that of Electronic Arts. While EA's revenue was down 12% year over year, Activision saw a minor decline of just 4%.

However, EA will try to get back at Activision by launching its next downloadable content pack, Dragon's Teeth. This expansion pack is expected to go on sale soon, and could help EA claw back some market share from Call of Duty for some time. However, since Activision is already working on Call of Duty's next installment, only time can tell how successful the next expansion pack from EA will be.

The bottom line
Activision's pipeline looks strong as the company is looking to build upon the success of its existing franchises by launching new games. Also, its forays into other platforms such as Android and iOS should also increase its addressable market going forward. So there's little doubt that Activision will continue its impressive performance going forward and add to the 15% stock price appreciation that it has already delivered this year.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Apple, and Google (C shares). The Motley Fool owns shares of Activision Blizzard, Apple, Google (C shares), and Microsoft. 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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