Activision Blizzard (ATVI) is one of the largest game companies in the world. It's known for making games that keep players engaged long after the original release date. World of Warcraft was originally released in 2004, but regular updates have ensured that it's still one of the company's top moneymakers. Call of Duty, World of Warcraft, and mobile game Candy Crush together comprise two-thirds of the company's annual revenue.
Growing the audience for these games and others, such as Overwatch, Diablo, and Hearthstone, is one of management's top objectives. Activision Blizzard's growth strategy is simple: Make compelling titles, attract players, and monetize those players with virtual items sold in-game. Activision is also pursuing other opportunities in esports and consumer products to provide new ways for players to spend money on their passion.
Here are three charts that show how this strategy is working.
Activision Blizzard announced "Overwatch 2" in Nov. 2019. Image source: Activision Blizzard.https://www.businesswire.com/news/home/20191101005577/en/New-Era-Dawns-Blizzard-Entertainment's-Team-Based-Shooter
Monthly active users
One metric management emphasizes every quarter when it reports earnings is monthly active users. It's not a perfect measure of the actual number of unique players engaged with the company's games, though.
For example, in the Activision and King segments, a single player who accesses the same game on two different devices would be counted as two users. What's most important is focusing not on the absolute number but on the trend over time.
Data source: Activision Blizzard. Chart by author.
This metric typically sees swings around new game releases, which explains the recent jump in users in 2019. While the Activision and Blizzard segments have seen relatively stable monthly active users, most of the recent decline is from less engaged players leaving King's mobile games, as the company discloses in its annual report.
Last fall, Activision released Call of Duty Mobile, which boosted MAUs for the segment from 36 million to 128 million. That's an increase of 256% in a single quarter, which was enough to lift active users across the company to 409 million. An increase that big indicates that the new free-to-play Call of Duty title likely attracted players who are new to the franchise.
A month ago, Activision released Call of Duty: Warzone, a free-to-play battle royale title for console and PC. More than 50 million players have already signed up to play the game. That should push monthly active users higher for the first quarter.
Monetization trends
Investors should keep in mind that period-to-period fluctuations in monthly active users (MAUs) "may not be indicative of longer-term trends," as the company states in the annual report. Here's why.
Activision Blizzard's MAUs were 530 million at the end of 2015. MAUs had fallen to 316 million as of Sept. 2019 before the launch of Call of Duty Mobile last October.
That's an alarming slide, but despite the 40% decline in users over that time period, total revenue increased 39% to $6.5 billion. One reason for that increase was the acquisition of King Digital Entertainment in 2016, but even since the end of 2016, Activision Blizzard's revenue has remained roughly flat, despite the steep falloff in MAUs.
This means Activision Blizzard is doing a good job of squeezing more revenue out of each player. This is why it's just as important to look at MAUs in relation to revenue, or revenue per monthly active user. This measure paints a completely different picture of the company's performance.
Data source: Activision Blizzard. Chart by author.
The increase from 2015 through 2018 shows how well the company was monetizing its players. This improvement is due to many factors, including additional revenue coming in from esports and a steady flow of new in-game content across the company's franchises.
The decline in revenue per active user in 2019 owes to the surge in players in the fourth quarter who downloaded Call of Duty Mobile, which is free to play. It will take Activision a while to monetize those new players, but if the company could generate an average of, say, $5 per player in Call of Duty Mobile and Warzone, Activision could potentially make more than $500 million per year off of those two titles combined.
For perspective, all free-to-play mobile games generated $87 billion in revenue in 2019, according to SuperData. The top earner was Epic Games' Fortnite: Battle Royale, which brought in $1.8 billion for its creators. Activision Blizzard's Candy Crush Saga generated an estimated $1.5 billion in sales.
The best mobile games are highly lucrative properties for the companies that make these games. Activision certainly has an opportunity to generate a lot of revenue from Call of Duty Mobile and Warzone given the popularity of the franchise, which typically ranks as one of the top-selling console/PC games every year.
Long-term growth
With the company showing that it can increase the amount of revenue it generates from its player base, this growth stock is in position to reward investors over time. As you can see in the next chart, free cash flow has been very lumpy over the years, but the trend is heading in a wealth-building direction for shareholders.
ATVI Free Cash Flow data by YCharts.
CEO Bobby Kotick is one of the best capital allocators in the industry. He is known to discontinue certain franchises if they're not generating good returns on investment. This happened over a year ago, when management announced it was selling the rights to the Destiny franchise back to Bungie, the studio that developed the game in partnership with Activision. The void of not having Destiny in the lineup is one reason revenue declined from $7.5 billion in 2018 to $6.5 billion last year.
Activision Blizzard should return to growth in the near future. Kotick told CNBC last November that he sees no reason why the company can't have 1 billion users in five years. Activision Blizzard has numerous projects under way, including Overwatch 2 and a new Diablo game for traditional gaming platforms and mobile devices. The company is aiming to rework its biggest franchises for mobile devices, which could lead to substantial growth over the next 10 years.
