Activision Blizzard (NASDAQ:ATVI) reported strong earnings for the first quarter of 2020, benefiting from an increase in video gaming time as people sheltered at home due to the coronavirus pandemic. The outcome resulted in the stock reaching a 52-week high of $75.97 on May 11.

With coronavirus lockdowns just starting to ease, gaming time is likely to remain high for now. While the current circumstances help Activision Blizzard in the short term, can it generate outsize returns post-pandemic and perhaps help investors make a million in returns? Let's dig into the company to find out.

Man holds a video game controller while playing a video game on his television.

Image source: Getty Images.

The path to success

Activision Blizzard made strategic moves in 2019 to set itself up for success in 2020. The company struggled last year, with revenue down 13% year over year. It executed a restructuring plan to focus on extending its handful of popular franchises beyond selling physical copies for gaming consoles and PCs. Now Activision Blizzard is expanding its gaming content online and on mobile devices to align with modern consumer gaming trends.

The move is paying off. The company reported $1.8 billion in GAAP first-quarter revenue and $0.65 in earnings per share, exceeding its guidance of $1.6 billion and $0.55 EPS.

The mobile segment delivered the largest year-over-year revenue increase across all gaming platforms. It rose to $570 million in the first quarter, compared with $535 million a year ago, approaching the $594 million generated by console gaming, the company's top revenue source.

A mobile version of Activision Blizzard's well-known Call of Duty franchise, introduced last October, is contributing to the company's success. COO Daniel Alegre noted during the Q1 earnings call that the mobile game's consumer engagement and reach grew in March, leading in April to its highest in-game revenue since the game's rollout.

Activision Blizzard also extended its Call of Duty franchise into a free-to-play game in March called Call of Duty: Warzone, which uses in-game purchases to generate income, mimicking the successful business model of competitors. The Call of Duty additions propelled the Activision division to 64% year-over-year revenue growth in the first quarter.

Activision Blizzard also pursues in-game advertising (an effort my former co-worker is helping to lead), which saw Q1 revenue grow over 75% year over year. The company also touts esports capabilities, which contributed to the $126 million in other revenue it collected in Q1, up from $119 million a year ago.

Activision Blizzard was encouraged by its Q1 performance to offer 2020 guidance at a time when other companies pulled their forecasts due to the pandemic. It expects to earn $6.8 billion for the year, up from 2019's $6.5 billion. It also increased its dividend 11% over 2019.

With its current success fueled by its change in focus and shelter-at-home orders, the stock price has trended back toward 2018 levels.

ATVI Chart

ATVI data by YCharts.

The company's revenue guidance, along with stay-at-home requirements extending into May, suggest the second quarter should deliver continued strong performance.

A reliance on franchises

These results illustrate the importance of successful franchises in the video game industry, where a few games characteristically deliver significant revenue. The top 10 games accounted for a third of the U.S. gaming industry's sales in 2019.

That's why Activision Blizzard increased investment around its top franchises, which accounted for 67% of total net revenue in 2019. The company is also looking beyond gaming to extend its franchises further, although these efforts remain nascent.

This reliance on a handful of brands is both a blessing and a curse. It provides revenue opportunities but leaves the company vulnerable. If a franchise falls out of favor, as may be the case for its Overwatch property, it creates a revenue gap that isn't easily filled.

For now, Activision Blizzard reaps the benefits of modern digital gaming trends, creating year-round revenue opportunities. The company's digital channels, which also include licensing royalties, generated 81% of its first-quarter revenue, up 3% year over year.

The final verdict

Thanks to trends such as mobile gaming, in-game microtransactions, and the ability to sell downloadable add-on content to existing games, Activision Blizzard has several revenue streams. But its reliance on a handful of key franchises makes future growth unpredictable.

Activision Blizzard is a solid company and a worthwhile investment, but to generate big returns for investors, it would need to add successful new franchises capable of driving revenue higher. The company's franchise-dependent business model means it's a hit-or-miss opportunity when it comes to making investors wealthy enough to reach millionaire status.