It's been a good run for Activision Blizzard (NASDAQ:ATVI) over the last five years, with the stock up more than 400%. Looking back even further, since its IPO in the early 1990s Activision shares have left the broader market's 500% return in the dust with gains of more than 8,000%.
Even more impressive is that Activision has handily beaten its peers, Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO). As you can see in this chart, Activision began to separate itself from its rivals in just the last 10 years.
So, what's Activision's secret sauce? We're going to take a look at six things the company has done well over the years that has helped it stand out from the crowd. Two themes you'll notice are: 1) Blizzard clearly has extraordinarily talented folks who know how to make quality games, and 2) there's a managerial culture in place that is focused on running a financially sound ship.
Activision knows how to draw an audience
Over the years, one thing that stands out about Activision is that it consistently produces hit, after hit, after hit.
Activision typically has three games -- Overwatch, Hearthstone, and World of Warcraft -- ranking in the top 10 of the most watched games on Twitch and YouTube. That's more than any other game maker, and is a testament to the company's ability to release multiple games that appeal to a mass audience.
All together, there are 374 million monthly active users who spend an average of nearly an hour every day playing the company's games. Having millions of players spend time in these games helps the company learn what features players like the best, which helps Activision, in turn, continue pumping out high quality gaming experiences for its audiences.
World of Warcraft still going strong after 14 years
Activision would likely not be where it is today if not for World of Warcraft, which the company brought under its corporate umbrella when it acquired Blizzard Entertainment in 2008.
World of Warcraft is a subscription-based multi-player game that had 11.5 million paying subscribers in 2008, and still remains the most popular game in its genre today. Even now, 14 years after its release, the game generates hundreds of millions dollars annually in high margin subscription revenue.
Blizzard uses the profits from subscriptions to reinvest in new expansions to the base game, which it releases every few years. The next one -- The Battle of Azeroth -- releases in August this year, and should boost Blizzard's revenue for the third quarter.
Foresaw the esports opportunity
Activision Blizzard games like Starcraft and Call of Duty have been staples on the competitive gaming scene for a number of years. But the recently launched Overwatch League is in a completely different, well, league when it comes to esports.
Blizzard first announced that Overwatch was under development in 2014. In late 2016, with Overwatch gaining worldwide popularity after its release earlier that year, the company announced it was forming a professional esport based on the game. After a very successful first season, in which the company gained mainstream media attention and attracted major sponsors like T-Mobile Us and Toyota Motor, Overwatch League is looking like the hottest esport around with 20,000 tickets to the Grand Finals at Barclays Center in Brooklyn selling out within two weeks.
It's clear management saw the esports opportunity early and designed a game specifically to capitalize on a fast-growing esports market that could become a multi-billion dollar opportunity over the long term.
A culture focused on profitable growth
Foreseeing a potentially lucrative opportunity like esports shows the kind of CEO Bobby Kotick is. He has made pivotal decisions in his 27 year tenure at Activision that have helped deliver market-beating returns to shareholders, including the 2008 acquisition of Blizzard Entertainment and the 2013 buyback of Vivendi's controlling stake in Activision.
Kotick has also made key operational decisions that have helped steer the company toward better profitability. For example, he made the decision in 2010 to discontinue the once popular Guitar Hero when that game was no longer delivering adequate returns on investment. That vision and focus has kept money coming in, allowing the company to invest in the next big thing and reward shareholders.
Returns cash to shareholders
With a management team that is focused on maximizing profitability, it's no surprise that Activision generates more free cash flow annually than its U.S.-based peers, with $2.166 billion over the trailing 12-month period.
Management's financial stewardship has led to Activision being the only game company among its U.S.-based peers to pay a regular dividend to shareholders. The current dividend yield is 0.45%, and the payout has increased every year since the dividend was initiated in 2010 for a total increase of 127%.
Uses financial success to support good causes
Activision Blizzard 's knack for consistently producing hit games has left it with plenty of profits to dish back to shareholders, but the company has also done quite a bit to support good causes. For example, through its Call of Duty Endowment, Activision has helped 40,000 unemployed veterans find high quality jobs.
In May of this year, Blizzard did something that speaks as much to the power of its games to make money as anything else. The company released a new digital character skin for the most popular character in Overwatch. Players could purchase the upgrade for $15 for a limited time, and Blizzard pledged to donate 100% of the proceeds to the Breast Cancer Research Foundation.
The release was a huge success, raising $12.7 million -- the largest sing-year corporate donation the foundation has ever received.
With great games, strong financial management, and a commitment to helping others, Activision stands out in the gaming space. No wonder investors have bought up shares over the past two decades.