26 BARRON’S September 2, 2019
TechTrader
Activision Blizzard Gets Back in the Game
ByTaeKim
IN A STOCK MARKET WHERE TRADE TALK, INTEREST
rates,andrecessionfearsseemtodominatefundamen-
tals, there’s still at least one industry in which inves-
torscanmakemoneybysimplyfocusingonproducts.
Forvideogamestocks,itjustcomesdowntothegames.
This column has closely covered opportunities in
thegamingspace.InJanuary,wewrotepositivelyon
Nintendo (ticker:NTDOY),citingthegamepublisher’svaluablefran-
chises,promisingprospects,andcheapvaluation.Itssharesareup36%
since then. Three months ago, we noted that Take-Two Interactive
Software (TTWO)wasattractive,givengamers’excitementaroundits
new titles. The stock has since rallied 24%, boosted by
strong earnings and higher guidance.
Thegamingindustrynowhasanotherintriguingsetup.
Eventsoverthepastweekhavedramaticallybrightened
the outlook for Activision Blizzard (ATVI).
Last Monday, the game publisher rereleased the 15-
year-old version of its popular World of Warcraft online
role-playing game, naming it World of Warcraft Classic.
Gamers flocked to the release, filling internet message
boards with nostalgic delight.
Kotaku,awidelyreadgamingnewssite,saidthat “everybody’sgoing
bonkers”for WorldofWarcraftClassic ,citinghours-longlogintimes.
Withoverwhelmedserversandinsanelylongwaittimes,it’sclearthat
the game is doing better than the company had expected.
BlizzardEntertainmenttells Barron’s that WorldofWarcraftClassic
setarecordforlaunch-dayconcurrentviewersonAmazon.com-owned
Twitch,wherepeoplewatchothergamersplaylive.Morethan1.1mil-
lionviewerswerewatchingthegameatthesametimeondayone,and
it got 6.1 million unique viewers in the first 24 hours.
“So far, it appears interest is really strong,” Piper Jaffray analyst
Michael Olson says. “ World of Warcraft Classic is another piece of
incremental revenue to layer into late 2019 and into 2020 that could
result in accelerating revenue growth for Activision Blizzard.”
Thebusinessmodelfor WorldofWarcraft ishighlyprofitable,with
asubscriptioncosting$15amonth.If WorldofWarcraftClassic drives
acouplemillionnewsubscribersforafewquarters,itwouldboostthe
company’s earnings significantly.
Activisionisalsogoingbacktobasicswith CallofDuty, arguablyits
most important franchise. The coming version, Call of Duty: Modern
Warfare, is slated to launch in October. It will be a reimagined version
ofthepopular2007game,whichwassimilarlytitled CallofDuty4:Mod-
ern Warfare. The new game may do better than investors think.
A week ago, Activision offered its first public demo of the game for
PlayStation 4 owners. It was well received by the gaming community,
whichlaudedthetitle’srealism,grittygameplay,andimprovedgraphics—
all dramatic upgrades from recent Call of Duty titles. Having played
nearlyevery CallofDuty game,Iwassimilarlyimpressedbythedemo.
There’sagoodreasonfortheimprovement.IaskedActivisionabout
the game makers, and the company confirmed that five of the senior
developershadworkedonthe2007 CallofDuty original.Thatgrouphad
left Activision for a long period before returning in recent years.
SunTrustRobinsonHumphreyanalystMatthewThorntonisoptimis-
ticon CallofDuty’ ssalesoutlook.“Thegamelooksgreat,”hetoldme,
and “it’s launching in a much more benign competitive environment.”
Piper Jaffray’s Olson said his firm’s recent survey of 500 gamers
showedthatthenew CallofDuty istrackingaheadof Fortnite asthe
No.1 title that gamers are “most excited to play” over the next year.
ThisallmarksasurprisingturnaroundforActivisionBlizzard.Atthe
beginning of the year, we said the stock would probably
be “dead money” in 2019, due to disappointing financial
performance and a questionable pipeline of games. The
shares are up just 4% since that column ran, underper-
forming the S&P 500 index by six percentage points.
But it looks as if the 2019 releases will do better than
expected,buildingabridgeintoabettercyclestartingnext
year, when new gaming consoles hit the market. The
companyalsohassequelsplannedforitsotherblockbuster
franchises— Overwatch and Diablo —in the coming years.
Inaddition,Activisionhasaddressed someoftheconcernabout
lootboxes,acontroversiallottery-likefeatureingamesthathasbecome
anincreasinglyimportantsourceofrevenueforthevideogameindustry.
Activision Blizzard confirmed to Barron’s that it will disclose loot-box
odds for its games by the end of 2020, a move first announced by the
Entertainment Software Association in August. That’s a positive,
consumer-friendlystepthatcouldaddfairnesstothesystemandreduce
the chance of government regulation.
InvestorshavebeguntopickuponthegoodnewsaroundActivision
Blizzard.Thestockrose7%thispastweek,to$50.60,butthere’sproba-
bly still plenty of upside. The shares are down nearly 40% from last
fall’s2018high,andcurrentlytradeatareasonable20timesexpected
earnings for the company’s next year.
Much of Wall Street is probably being too conservative about the
publisher’sprofitgrowth.SunTrust’sThorntonpredictsthatActivision
Blizzard earnings per share will climb by more than 15% a year and
that sales will increase by 10% annually in 2020 and 2021.
“There is a lot in the pipeline coming off a rebased 2019 year—
includingsomeverybigintellectualpropertyinthenextcoupleyears,”
Thorntonsays.HethinksthatBlizzardcouldannounceanew Overwatch
or Diablo atitsgamingconferenceinNovember,whichcouldbeacatalyst
forthestock.ThorntonhasaBuyratingontheshareswitha$56price
target,11%aboveFriday’sclose.Withthegoodnewsmounting,Activi-
sion Blizzard could once again be worth a play.
email: [email protected]
Fortechinvestors
waryoftradewars,
videogamestockshave
asimpleplaybook:
Makegoodgames.