Company Overview: Activision Blizzard, Inc. (NASDAQ: ATVI) is engaged in developing and publishing interactive games and services. It distributes entertainment content and services on video game consoles, personal computers (PCs), and mobile devices. It also offers digital advertising and operates esports leagues through its subsidiaries.

ATVI Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Significant Growth in Total Revenue: In Q2FY21, the company's total net revenues were USD 2.30 billion, exceeding its prior outlook of USD 2.14 billion and representing an 18.84% increase year-over-year.
• Improvement in Net Income: Net income for Q2FY21 was USD 876 million vs. USD 580 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.12.
• Reduction in Net Bookings: ATVI's net bookings for the quarter were USD 1.92 billion, lower than USD 2.08 billion for Q2FY20. Its in-game net bookings amounted to USD 1.32 billion vs. USD1.37 billion for Q2FY20.

New Product Launches: On July 01, 2021, it announced a 135-card expansion (Questline cards) by United in Stormwind for Hearthstone, a digital card game played by over 130 million people worldwide. Each of these cards provides intriguing stories of mercenary characters.

Previously, on June 13, 2021, ATVI launched Diablo II: Resurrected, a role-playing game, to Windows PC, Xbox Series X|S, Xbox One, PlayStation 5, PlayStation 4, and Nintendo Switch. The multiplayer open beta will be officially launched in August.

Segment-Wise Revenue Generation: The company sells full games and in-games, subscriptions, and licenses software to third-party firms through three reportable segments.

• Activision Publishing (Key Franchises: Call of Duty (CoD), Warzone): Q2FY21 revenue amounted to USD 1.08 billion, up 24.37% year-over-year, with 127 million Monthly Active Users (MAUs) in Q2FY21. The CoD ecosystem witnessed higher levels of player engagement and investment across console, PC, and mobile.
• Blizzard Entertainment (Key Franchises: World of Warcraft, Hearthstone, Diablo, Overwatch): This segment generated USD 515 million in revenues in Q2FY21 vs. USD 440 million in Q2FY20, with 26 million MAUs in Q2FY21.
• King Digital Entertainment (Key Franchise: Candy Crush): Q2FY21 Revenue was USD 638 million, up 16.21% year-over-year, with 255 million MAUs during the quarter. Candy Crush was ranked the highest-grossing game franchise in the U.S. app stores.

Other Key Findings in Q2FY21

• During the period, ATVI continued to expand the scope of its largest franchises, CoD, World of Warcraft, and Candy Crush, which experienced robust growth even with the lifting of the lockdowns in various countries.
• ATVI paid a cash dividend of USD 0.47 per share (amounting to USD 365 million) on May 06, 2021, to shareholders of record on April 15, 2021.
• 62% of the total net revenues in Q2FY21 were generated from the Americas, and the EMEA and the Asia Pacific accounted for 30.27% and 11.11%, respectively.
• Based on platforms, sales on consoles represented 32.23% of the total net revenues, while sales on PCs and Mobiles represented 27.35% and 34.63%, respectively.

Region & Platform-Wise Performance in Q2FY21; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Robust Cash Balance: The company exited Q2FY21 with a cash balance (including short-term investments) of USD 9.63 billion, 9.16% more than USD 8.82 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in Q2FY21 was USD 768 million vs. USD 388 million in Q2FY20.
• Stable Debt: ATVI's total outstanding debt amounted to USD 3.61 billion at Q2FY21 end, at par with the total debt as of December 31, 2020.

Key Metrics: In Q2FY21, ATVI's EBITDA and operating margins were 47.1% and 41.8%, higher than the industry median of 12.3% and 5.9%, respectively. ROE stood at 5.5%, an improvement from 4.3% for Q2FY20. Debt/Equity was 0.22x as of June 30, 2021, vs. 0.20x as of June 30, 2020.

Growth & Profitability Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 37.72% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and Fidelity Management & Research Co. LLC hold the maximum stake in the company at 8.27% and 5.39%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Adverse Publicity: In connection with the complaint filed by the State of California in July 2021 alleging violations of the California Fair Employment and Housing Act and the California Equal Pay, the company may face adverse publicity, reduced productivity, and other negative consequences.
• Customer Concentration: The company's key customers, Sony, Apple, Google, and Microsoft, accounted for 17%, 15%, 14%, and 11%, respectively, of its revenues in FY20.
• Dependence on Limited Franchises: In FY20, the company generated ~76% of the total net revenues from sales associated with Call of Duty, Candy Crush, and World of Warcraft franchises. These franchises also accounted for a significantly high percentage of the total operating income for FY20.
• Technology Risk: ATVI depends on servers and networks, some owned and operated by third parties, to operate its games with online features and gaming services. If it loses functionality in any of these areas for any reason, its business could be negatively impacted.

Outlook

• ATVI stated that its business and financial condition remain strong and well placed to continue to generate significant operating cash flows despite the global impact of the COVID-19 pandemic.
• The company plans to continue to address the concerns of its employees and other stakeholders raised in the complaint filed against it by the State of California in July 2021.
• In FY21, it expects its GAAP revenue and EPS to be USD 8.52 billion and USD 3.08, respectively.
• In the short term, revenue and EPS for Q3FY21 are estimated to be USD 1.97 billion and USD 0.64.
• Its projections for net bookings are USD 8.65 billion for FY21 and USD 1.85 billion for Q3FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, ATVI stock corrected ~17.28%. The stock is currently close to the mid-point of its 52-week range of USD 71.19 to USD 104.53. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the risks involved with the recent State of California complaint, customer concentration, dependence on few popular franchises, and technology risk. We have taken peers like Electronic Arts Inc. (NASDAQ: EA) and Take-Two Interactive Software, Inc. (NASDAQ: TTWO). Considering the robust top and bottom-line growth, continuous product expansions, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 85.00, up ~2.42% as of August 11, 2021.

ATVI Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

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Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.