Activision Blizzard Has a Date With Destiny in the Fall

Activision's first-quarter earnings benefited from a surprise World of Warcraft subscriptions spike and strong Call of Duty sales, and were reinforced by Q2 earnings, despite them being traditionally a cooling-off period. With Destiny and the new Call of Duty coming out later this year, and E3 this week, can Activision ride high expectations to continued excellence?

Jun 15, 2014 at 2:04PM

On May 6, the early favorite for surprise stock of the year, Activision Blizzard (NASDAQ:ATVI), released its second-quarter earnings. Three months removed from an unexpected gap-up in share price after its first-quarter report, thanks to a bump in World of Warcraft subscriptions, Activision notched slightly higher and has increased to $21 per share over the last month. With E3 on every industry insider's mind, investors will look for strong guidance and the company's plans for both the summer and the holiday season.

Success in the free-to-play market
Last quarter, Activision reported that World of Warcraft had a bump in subscriptions for the first time in years, thanks to a new expansion package. This was significant for the company's bedrock MMORPG, given the revenue stream WoW generates. It also silenced critics who had claimed that the game was obsolete and that it verged on being the company's Achilles Heel, rather than its cash cow.

Analysts will look at the presence of Activision's newest strategy card game, Hearthstone, for iPad and Android. Unlike WoW, the game is free to play, with revenue coming from the purchase of in-game gold used to play in "Arena" tournaments, as well as from other purchases. While it has a lower monetization rate than WoW's subscriptions, the game has hit 10 million accounts since its launch.

Hearthstone won't be the revenue goliath that WoW is, but it signals Activision's diversification in the MMORPG market, and it could potentially offset losses from WoW cancellations, offering growth potential for the rest of the year.

Bungie's big reentry
The big news that investors and gamers will be looking for is the much-anticipated Bungie-IP game, Destiny. Both are set to come out this fall. Destiny was the non-console talk of E3 2013, and it is the first game Bungie has made since signing on with Activision in 2010. At this year's E3 conference, industry insiders will be looking to hear more about the game and its mechanics.

Activision CEO Bobby Kotick has already labelled it "the biggest new IP launch of all time," and with an open-world format it will be a unique offering in the video game world. Bungie is famous for the still-popular Halo franchise, so observers will have high expectations for Destiny. But, if the popularity of open-world games, and Bungie's track record, are of any indication, this game should have no problem keeping investors hooked.

How to keep CoD alive
Aside from World of Warcraft¸ Call of Duty is Activision's other big-money franchise. With an eye toward keeping people interested in the long-running franchise, Activision has shifted the development window to three years for each of the game's three studios. This ensures each new edition of the game is new enough for people to justify plunking down $60 for it, and also gives the company time to profit from downloadable content for the existing games.

With Ghosts' impressive sales last quarter, new purchases may show a down tick this quarter. However, thanks to reports that consumers bought a total of 12 million Sony PS4s and Microsoft (NASDAQ:MSFT) Xbox Ones, and with Ghost being one of the launch titles, strong downloadable-content figures for the quarter seem likely, which will further encourage investors. 

At E3 last week, the newest entry to the saga Advanced Warfare, was Microsoft's lead-off game at its press conference. Since Microsoft devoted most of its conference to game development, the focus stayed on Activision and other spotlighted companies adapting to the new consoles rather than any serious hardware upgrades. In addition, Microsoft will have downloadable content exclusively for the Xbox One with the game, which will help Activision keep the series interesting as well as give Microsoft a significant boost over its main competitor. 

Reading the charts
After gapping up 12% off of first-quarter earnings, Activision has only slipped 1.58% in share price since then, as the support level has remained at roughly $19.60 per share. This was similar to the company's 11% gap up after its first-quarter 2013 report, which is normal because people buy the most games during the big holiday quarter. However, the stock rose 9% between reports, far better than its performance in 2014. That strong performance stemmed from high expectations for Skylanders SWAP Force and Call of Duty: Ghosts, which were unequivocally met by year's end.

Investors have every reason to expect the company to remain strong coming out of E3 and into the holiday season. It was a good E3, with Call of Duty: Advanced Warfare hyping the crowd up and Destiny looking to remain at the front of investors' minds. While an E3 bump isn't like an earnings bump, it can still provide a clue as to how investors might react to Activision's plans for the holiday season, and in the new console marketplace. 

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John McKenna owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Apple. The Motley Fool owns shares of Activision Blizzard, Apple, 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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