Activision Blizzard's (ATVI) second-quarter results showed the company's growth stalling out after the big 2020 it had during the pandemic. The stay-at-home environment during the year led to 32% growth in bookings (a non-GAAP measure of revenue), with players spending more time in the company's games. The company is still seeing strong engagement, but growth comparisons have gotten more challenging. While management raised full-year guidance, bookings are expected to be up only 2.7% in 2021.
However, analysts expect a big year in 2022. Early estimates have bookings reaching $9.95 billion next year, up 16% over expected bookings for 2021, as the company gets set to launch a series of new games in the Diablo franchise, but there are risks.
Image source: Activision Blizzard.
Releases to watch
The Activision segment posted lower revenue last quarter, but it's in good shape, with monthly active users (MAUs) up three times over the same quarter two years ago.
The Blizzard side is where investors should focus. The segment includes results from several titles, including World of Warcraft, Overwatch, and Diablo, but MAUs have been gradually declining. Blizzard peaked at 46 million users in Q2 2017, when Overwatch seemed to be at the height of its popularity. In the most recent quarter, Blizzard's MAUs stood at 26 million.
Given the long slide in Blizzard MAUs that has lasted four years, it might seem as if there is no sense of urgency at the Blizzard studio. The recent leadership change at Blizzard following the lawsuit alleging sexual harassment and discrimination certainly doesn't help future revenue visibility.
Nonetheless, Blizzard is already progressing well into production on some of its major upcoming releases.
On the second-quarter earnings call, Executive Vice President of Blizzard Incubation Allen Adham said, "We're tight-lipped about it, but our new game pipeline has been in development for many years and is greater than it's ever been across our core franchises and mobile, new IP and new genres."
The upcoming remastered version of Diablo 2 could deliver surprise sales, given the long time that has gone by since the last release for the franchise in 2012. The remastered title will serve as a warm-up for what's coming.
Diablo: Immortal for mobile devices is now expected in the first half of 2022. During the Q2 earnings call, Chief Operating Office Daniel Alegre said, "We see substantial potential for this release, both in its own right as a long-running authentic Diablo experience and to broaden the franchise's reach ahead of Diablo IV."
This is the first time that Blizzard has had the benefit of using a mobile experience to expand the audience ahead of a major new release in the Diablo series. For that reason alone, investors should expect massive sales of Diablo IV when it releases. The 2012 release of Diablo 3 sold 12 million copies in the first year of launch.
Overwatch 2 also seems to be coming along well but, like Diablo 4, the release timing is still uncertain, as the game is still in the middle of development. Jen Oneal, one of the new co-leads at Blizzard, said she is seeing "great progress on Overwatch 2 and the multiple games in the Diablo universe." The original Overwatch sold 50 million copies.
Follow the money
Activision Blizzard continues to ramp up its research and development spending ahead of these releases, which could be a sign of significant growth ahead. 
ATVI Research and Development Expense (TTM) data by YCharts.
Activision Blizzard's total R&D spending has accelerated recently, alongside competitors like Electronic Arts and Take-Two Interactive. These companies are all aiming to expand their content portfolio in the next decade.
Call of Duty: Mobile is on track to reach $1 billion in consumer spending this year, with momentum building in China. Worldwide, the game has been downloaded more than 500 million times, and the company is directing more R&D to new releases in the franchise on mobile to keep the momentum going, including opening a new studio and expanding development teams in China. A new mobile title in the Call of Duty franchise "will help take the franchise to new heights," according to Alegre.
Risks to watch
Activision Blizzard is not without risks. There are the normal delays that could happen that could push back the releases of Immortal and other titles further out to 2023 or later. Plus, we still don't know exactly what impact the recent leadership changes at Blizzard will have on the studio over the long term.
Investors should note that the company is well aware of the potential impact of the allegations made against the Blizzard studio in its recent earnings report: "If we experience prolonged periods of adverse publicity, significantly reduced productivity or other negative consequences relating to this matter, our business likely would be adversely impacted. We are carefully monitoring all aspects of our business for any such impacts."
The current consensus analyst estimate has Activision Blizzard posting $9.95 billion in bookings in 2022, up from management's guidance of $8.65 billion for 2021, which implies expectations for strong sales from the new releases.
Even factoring in the risks, the recent dip in the stock has taken some of the premium out of the share price, which makes this video game stock more attractive from a valuation perspective. The stock has fallen 7.6% over the last month following negative news, but I think that presents a great opportunity to buy a premier video game producer at a discount.
