Can New Consoles Save Activision Blizzard?

Jag is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Activision Blizzard (NASDAQ: ATVI) is a name to reckon with in the gaming sector. Since the sector is at a turning point with the release of new gaming consoles near the end of the year, it's high time to assess the investment potential of Activision, whose stock has seen a good runup this year. The company is currently in top gear: The launch of new gaming consoles will bring new titles. At the same time, Activision is fighting an IP battle with Worlds Inc. Apart from micro issues, like this lawsuit, the company is also dealing with macro issues like an overall drop in the video game segment, which could take its toll on the company’s fortunes.

Stemming the revenue drop

For its first quarter results, Activision announced $804 million in revenue, up from the $587 million reported for the first quarter of the previous year. However, the worrisome factor was related to subscription loss for its blockbuster World of Warcraft. While it retained the title of #1 subscription based MMORPG, the game lost more than 10% of its subscribers in a single quarter, with more than 1 million players dropping out.

With a slew of Free to Play game titles coming up, it is not surprising that gamers are becoming more and more reluctant about paying subscription fees. Activision is not the only company feeling the pain. Its closest rival, Electronic Arts (NASDAQ: EA), chose to follow the trend instead of fighting, as it moved its Star Wars: The Old Republic title from a subscription-based platform to the Free to Play model. While Electronic Arts’ Star Wars was way behind Activision’s WoW, with its subscription topping out at 1.7 million, this move to the FTP model is a harbinger of the things to come.

World of Warcraft has seen a seesaw pattern in its subscription numbers in the past as well, based on the period between expansion packs. This time, the company's CEO expects subscription numbers to fall through the year. The drop in numbers is a cause of concern; however, Activision has seen a fall in its WoW subscriptions in the past and every time managed to rise again, with each new expansion bringing players back for more. This time, WoW may have less resilience, as the game is already nine years old.

Exclusive content collaborations

Activision is looking towards Call of Duty and Destiny to fill the void this year. After Nintendo’s Wii debacle, entire industry is now focused on the launch of PlayStation 4 and Xbox One. Activision is looking to maintain its console agnostic status, but at the very same time, it is also pushing towards exclusive content collaborations. The company stated that such collaboration may help it in augmenting its market push for the products.

Activision would be releasing Call of Duty-Ghosts on Xbox One and PlayStation 4. The rumored launch date is said to be in early November. Activision is also following its peer Electronic Arts footsteps as it will release its Call of Duty DLC first on Xbox One. Electronic Arts, on the other hand, will be releasing Titanfall exclusively for Xbox consoles.

Microsoft (NASDAQ: MSFT) is marketing its Xbox One more as a media center than as a standalone gaming console. Despite Sony’s pessimism about its PlayStation 4, Microsoft is pretty positive about Xbox One. The company plans to sell anywhere between 400 million to 1 billion units of its next gen Xbox. Such optimism is good news for Activision as well, as it will be releasing Destiny on Xbox One next year.

Bottom line

Sagging video games sales and plummeting WoW subscriptions may spell trouble for Activision Blizzard, but the company is adapting itself to newer trends. It is taking to release more frequent updates to games to keep gamers occupied. Activision’s new Call of Duty: Black Ops II DLC is now available. It is also meditating about the mobile market, although yet has to make any concrete game plan.

New consoles are expected to help the company in beating the negative trend. Activision reported better than expected results for the first quarter. Despite tight guidance, second quarter results are also likely to beat estimates. The company also has many positive catalysts coming up in the form of new DLCs and game launches.

Activision's stock saw a good runup this year, but it still trades at comparatively low forward P/E ratio of 13.43, while peers like Electronic Arts commands forward P/E ratio of 15.4. The stock is a good buy, but keep a cautious outlook.


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Jag Mitra has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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