The Biz – G^G Gaming Portfolio – Activision(ATVI): Q2 2019 Due Diligence

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Due Diligence
Activision - 2019Q2

DISCLAIMER: I am not licensed in any way shape or form to advise you on how to purchase stocks. If you gamble away your financial future because of this blog post, then you are an even bigger idiot than I am. No matter whose advise you follow, please remember the golden rule… don’t invest more than you can afford to lose.

DISCLAIMER 2: While I am a fanboy of many products or companies mentioned in this blog, I am not affiliated with any of them.

So I want to kick this write-up off by saying that I am currently taking a fundamentals driven approach to investing. I believe that a large portion of the market makes decisions based off the intrinsic value of the companies they want to invest in. While there is unarguably value in technical trading patterns, these patterns will not be the focus of this write-up.

One stock that has been garnering a lot of interest lately is Activision Blizzard(ATVI). At time of writing its stock is currently sitting at 41.93, which is more or less the lowest its been since February 2017. While Activision is one of the most storied studios in gaming history, it is safe to say that there are a lot of concerns regarding the current trajectory of the company.

Why Is Activision In A Slump?

Peak Fortnite and Red Dead Redemption 2

WHAT HAPPENED: As far as I can tell, the initial drop in mid October took place simply due to intense competition. Fortnite was in full swing, and with Red Dead Redemption 2 coming out, those trading in the gaming industry were changing their positions out of ATVI.

WHY I’M NOT WORRIED: While I expect the battle royale format to live a long life, I am of the mindset that the current battle royale craze we are in is coming to an end. Although Activision missed the mark with their Call of Duty battle royale mode, as the battle royale playerbase continues to fragment with games like Apex Legends on the rise, any perceived wins or losses in this field will have less of an impact over time.

Blizzcon 2018 Is A Bust

WHAT HAPPENED: Simply put, Blizzard was completely tone deaf during Blizzcon 2018. Their core fanbase expected major franchise announcements, and instead they got Diablo Immortal(AKA Diablo Mobile). This sent stock prices into a free-fall as people started to (rightfully) doubt the direction Blizzard was heading in. Since then we haven’t really heard much from them on the development front, just the same chorus of people lamenting their latest blunder.

WHY I’M NOT WORRIED: While I would have liked to hear something along the lines of a Diablo 4 announcement(I am an avid fan of the first 3 games), in the long run Diablo Immortal may actually be a positive play. While Candy Crush has been a reliable earner, Activision’s mobile catalog as a whole has been pretty barren as of late. I still believe the mobile market has a severe lack of high quality games, so a Diablo 3 clone of sorts could actually make an impact. If they focus on monetizing cosmetics while avoiding the temptation to allow players to “buy power”(hopefully taking their lessons learned from Diablo 3’s Real Money Auction House(RMAH) to heart), then Diablo Immortal could end up being a great stop-gap measure while they wind up their next big play.

Activision Splits with Bungie

WHAT HAPPENED: Another contributor to the ATVI slump was their their sudden split with bungie in early 2019. This unexpected move has also triggered a class action lawsuit calling on anyone who invested in ATVI securities between 2018/08/02 and 2019/01/10 to join in.

WHY I’M NOT WORRIED: Thus far this episode hasn’t resulted in a major dip of stock prices. In fact, I’m impressed with how steady ATVI’s floor has been despite the continuous media dog-pile. I anticipate the price to dip a bit lower, but I expect the price floor to rest around $40.

Activision Fires 8% of Their Staff After Posting Record Earnings

WHAT HAPPENED: There was some confusion amongst fans and gaming journalists when Activision announced that they cut 8% of their staff right after posting record revenues.

WHY I’M NOT WORRIED: From a moral perspective, I think it is terrible what happened to the employees at Activision that got laid off. However, from a business perspective, transitioning from supporting old products to developing new ones makes a lot of sense. Blizzard is matching their 8% reduction in non-developer headcount with a 20% increase in developer headcount. This shift in priorities makes both the investor and gamer sides of me very excited for what is to come in the long-term.

Gaming Stocks Across The Board Are In A Slump

WHAT HAPPENED: At time of writing video game stocks are in a collective $247 billion dollar slump. As the cultural phenomenon that was battle royale games fades away, people are pulling their investments out of gaming stocks as the industry fades somewhat from the public consciousness.

WHY I’M NOT WORRIED: Fads come and go, but overall the industry is still growing. Newzoo estimates that the global video games industry will be worth $175 billion in 2021(compound annual growth rate of 6.7%). As new fads fade in and out stock prices will hit hills and valleys, but ultimately they will continue to grow.

Why Activision-Blizzard(ATVI) Is A Solid Long Term Play

Their Financials are Solid

As mentioned above, in 2018 they posted record earnings, despite heavy competition. Their balance sheet is also looking healthy with 4.23 billion in raw cash, and 1.49 in liabilities. Last but not least, they currently have a very healthy debt to equity ratio of 0.24 as of December 2018.

While these facts aren’t necessarily a signal for impending growth, it is definitely a good sign that they aren’t going anywhere. Couple that with the fact that they do at least offer some kind of dividend(0.73 at time of writing), and you have a recipe for a long term play.

They Are Backed By Some Of The Best Development Studios In The Industry

It is easy to panic when a company cuts ties with with a solid earner, but it is important to remember that Activision’s development core is strong. Between Blizzard Entertainment, Treyarch, Infinity Ward, King, and other smaller studios developing under their banner; they have incredible development capacity.

While there is legitimate concern about whether or not they can successfully pivot away from their declining franchises, I am confident that they have the talent to do so. This is going to be a problem for their leadership, and right now their leadership seems to be focused on the right thing, making amazing games.

My Position

I am planning on swing trading ATVI for the time being, then going long as E3 2019 approaches. Despite my obvious optimism in the long term, I expect things to get a little bit darker before dawn. Activision management has even disclosed that they expect revenues to decline 20% in 2019. While that seems like an alarming number, I believe it is already priced into the market, so I am comfortable buying in.

At the end of they day, I am very comfortable with their current financial situation, and very happy that they have moved their focus back to game development. I expect big things out of Activsion, and I think there are opportunities for gains in both the short and long term.

Think I’m wrong about Activision? Tell me thoughts on Twitter via @GrowUpAndGame.

Thank you everyone, and until next time may the bulls be ever in your favor!

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