Activision Blizzard (ATVI) is on track to have a good 2020, and the momentum from this year should be a stepping-stone to continued growth in 2021. Overall, Activision Blizzard will be depending heavily on continued momentum in the Call of Duty franchise for growth in 2020. Here's where that might take the company in 2021.
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Milking Call of Duty for all its worth
Non-GAAP revenue and earnings are expected to increase by 5% and 13%, respectively, this year. The shares have been drifting higher, currently up 23% year to date, but still below the 2018 high. A valuation of 27 times earnings guidance for 2020 suggests investors are placing a premium on the company's ability to continue growing.
Timely releases got Activision off to a strong start for the year in the first quarter. The three recent Call of Duty releases -- Call of Duty: Mobile, Call of Duty: Warzone, and Call of Duty: Modern Warfare -- attracted a ton of new players to the franchise. The monthly active users in the Activision segment more than doubled year over year to 102 million in the first quarter. More players should provide plenty of additional monetization opportunities.
During the first-quarter earnings call, chief operating officer Daniel Alegre suggested the recent momentum in the Call of Duty franchise should spill over to next year: "With the Call of Duty demonstrating the power of our franchise model across platforms, geographies, and business model, and premium content on track for the fall, we really couldn't be more excited about the growth trajectory for 2020 and beyond."
Activision Blizzard should finish 2020 on a high note. The next installment of the Call of Duty series and the new World of Warcraft expansion will launch in the second half of the year. Management reported during the earnings call that increased engagement in World of Warcraft last quarter led to accelerating pre-sales of the upcoming World of Warcraft: Shadowlands expansion.
It's particularly encouraging that Modern Warfare has racked up more players than any previous Call of Duty title. That bodes well for continued strong sales with the next installment this fall.
Activision Blizzard will be relying heavily on ongoing engagement with existing franchises as 2021 rolls around. It's uncertain whether the next premium Call of Duty release will eclipse the record performance of Modern Warfare. Sell-through for Modern Warfare was the highest ever for the franchise following the initial launch quarter.
Despite that high hurdle, management is optimistic about the opportunity to monetize a larger player base, as CFO Dennis Durkin explained on the recent call: "The current environment creates the potential for a structural opportunity to bring more players into our communities, so we can then engage and retain for the long term and to accelerate the continuing shift toward digital sales in our business."
Part of this optimism stems from the growth of Call of Duty: Mobile, which is Activision's first major push into the lucrative and fast-growing mobile-game market. Alegre hinted that Call of Duty: Mobile will continue to grow its revenue beyond 2020: "With deep engagement, substantial content in the pipeline and opportunities to further refine the in-game system, we expect Call of Duty: Mobile to be an increasing contributor over time."
What to expect in 2021
There aren't many confirmed items yet on the 2021 release slate. The company is rolling out regional testing for Diablo: Immortal in the middle of this year, as well as other mobile titles. This means that the official release for Diablo: Immortal could happen during 2021. Diablo is a popular franchise within the Blizzard segment, and the new mobile version will be another stepping-stone for the company's push to reach more players in more geographies through the mobile-game market.
We know that Overwatch 2 and Diablo 4 are also in the works, but no release date has been announced so far for either title. Overwatch 2 and Diablo 4 will naturally provide a jump in sales in the year they get released. The original Overwatch reached a fairly large base of 50 million who have played the game.
Still, Activision Blizzard may not need new releases to keep the business growing next year. In-game revenue made up more than 60% of total bookings in the first quarter. Plus, Activision Blizzard continues to develop its smaller, but growing, revenue streams from advertising and esports.
Analysts currently anticipate revenue and adjusted earnings growing 8.8% and 14.1%, respectively, in 2021. Estimates this far out should be taken loosely, but clearly Wall Street analysts are looking at the same trends and expecting the company to maintain its current growth trajectory through 2021.
The company is gradually making progress on improving the performance of each franchise, following the restructuring effort announced a year ago, during the fourth-quarter 2018 conference call. We've seen the results of these efforts for Call of Duty. It seems that Overwatch and Diablo are next in line.
But even if Activision Blizzard doesn't release a major new title in 2021, the top video game company in America should be in good shape this time next year.
