Activision Blizzard (NASDAQ:ATVI) has been on a huge winning streak. The pubisher's share price trades approximately 50% higher than it did a year ago, and it has routinely beaten earnings per share expectations.
The company currently stands as the largest and most profitable third-party games publisher, and it has done an admirable job of growing high margin digital revenue. Even so, the gaming industry is in the midst of some big changes, and Activision's enviable position does not make it immune to damaging elements. These three risks threaten Activision Blizzard's outlook.
There may be roadblocks on the Internet superhighway
Take a glance at the most important games in Activison's stable and it's apparent that the publisher has a heavy online focus. Series like Diablo, Call of Duty, World of Warcraft emphasize connected play and create ongoing revenue streams by keeping users engaged on the Net. While Warcraft's paid subscription model may soon become a relic of the past, Activision Blizzard's belief in the importance of online connectivity is apparent in its upcoming IP Destiny. Even Near Field Communication toy-centric Skylanders makes substantial use of online features.
The push toward online business has been great for the company, but the apparent death of Net Neutrality brings troubling uncertainties. The looming potential mergers of telecom giants like Time Warner and Comcast, and AT&T and DirecTV signal the dawning of a new Internet era. Consumers paying more for Internet service and online content and content providers paying more to reach consumers are likely scenarios in this new epoch. Data caps and tiered usage plans could easily become the norm.
As big publishers like Activision and Electronic Arts (NASDAQ:EA) sell increasingly massive games and downloadable content, continue to emphasize persistent online worlds, and push increasing resolutions and streaming models, they're on course to come up against some of the hurdles currently facing Google and Netflix.
Activision's brightest stars could fade too quickly
Activision Blizzard is an industry leader across multiple genres, but the possibility exists that star properties like Call of Duty and Skylanders could lose steam earlier than anticipated. The Activision side of the company prides annual series installments, but frequent iteration also creates the risk of franchise burnout. Look to former Activision stars like Guitar Hero and Tony Hawk for evidence of this effect.
Unfortunately for Activision, some of its best performers are under heavy attack from strong competition. The first person shooter genre in which Call of Duty resides becomes more crowded with every year. 2014 alone will see the release of titles such as Titanfall, Call of Duty: Advanced Warfare, Battlefield: Hardline, Halo: The Master Chief Collection, Evolve, and Destiny. That's a lot of high profile competition, and 2013's Call of Duty: Ghosts already underperformed previous series high points.
EA has shown itself to be particularly interested in dominating the shooter space, regularly stating that it's aiming for Call of Duty's crown and providing sales information in relation to Activision's big series. EA has stated that it plans a fundamental reworking of its game development process in order to ensure better quality. The move comes after year's of criticism leveled at the publisher's output and was likely spurred on by reactions to the company's 2013 game Battlefield 4.
Some reports even suggest that EA released the game without adequate quality control in order to beat Call of Duty to the market. Still, an increased quality focus for EA could mean that Activision has to step up its own efforts. EA's franchise may already be gaining ground, with UK early sales of Battlefield 4 on PlayStation 4 tracking ahead of those for Call of Duty: Ghosts.
This year's Skylanders: Trap Team will also experience increased competition as Disney continues to expand its Infinity platform and Nintendo is getting in the NFC game with its Amiibo figures. Chances are good that other companies will follow suit at some point, and Activision will have to fight to preserve the draw of Skylanders.
Activision's big investments could miss the mark
Much has been made about the $500 million budget devoted to establishing Destiny as the next big thing in videogames. Activision President Bobby Kotick has stated that the Bungie-developed first-person shooter is the company's most expensive foray into new IP. He has also claimed that the game will go on to become the most successful new property in the history of the medium. The company expects the game to generate continued revenue from microtransactions and DLC expansions. If it fails to sell to a wide enough audience, the negative effects will be felt at multiple levels.
There's also a lot of pressure on Blizzard to deliver the next round of online megahits. The last fiscal quarter saw Blizzard bring in net revenue of $462 million and an operating income of $239 million, while the Activision side saw net revenue of $237 million and an operating income of $2 million. The World of WarCraft subscriber base continues to drop and the long-in-development MMO Titan had to be scrapped and restarted. The mysterious game is now set to debut in 2016. Blizzard's efforts are essential to the broader company, and a failure to create new online sensations would have seismic effects.
Is Activision Blizzard a good play?
Despite the risks facing the company, Activision Blizzard still stands as an advisable investment option. The company's top-notch IPs, digital business model, and development resources create the opportunity for healthy growth. The gaming industry is tumultuous, but it's also expanding rapidly, and Activision Blizzard stands to benefit as interactive entertainment progresses.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Google (A shares), Google (C shares), Netflix, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Google (A shares), Google (C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.