I shall begin this post with a…
I mean, how often do you get to nerd out about your interests and talk investing at the same time? I’m already excited at the prospect of writing this post that I’m probably going to write something gibberish andhardtounderstandlikethewayimtypingrightnow. 😛
With that warning out of the way, let’s talk Activision Blizzard (NASDAQ: ATVI).
To the uninitiated, ATVI is home to some of the oldest video game developers in the world. If you grew up in the 80s – 90s and are into games, you would have played their some of their classics. I recall playing Mechwarrior 2 (Activision) with my brother on my classic Pentium 1 PC. Towards the end of the 90s and early 2000s, I played the Starcraft and Warcraft 3 (Blizzard Entertainment) campaign over and over as it was that good. And of course, who can forget banging their heads against their Iphones trying to beat level 377 in Candy Crush Saga (King) in recent years.
In essence, I’ve named the 3 legs that the ATVI stool stands on:
Activision was founded in 1979 by developers who left Atari, one of the first home game consoles created. Since then, they have published many titles and undergone many acquisitions and restructuring exercises. Now, they are predominantly known for their Call of Duty and Destiny franchises, both popular competitive first person shooters on PC and consoles.
2) Blizzard Entertainment
Of the 3 legs, Blizzard Entertainment is the one closest to my heart. At almost every stage of my life, I’ve played and loved a Blizzard game. It started with StarCraft in the late 90s, WarCraft 3 in early 2000s, a bit of World of WarCraft during late 2000s, StarCraft 2 in early 2010s and finally now Hearthstone on my Iphone.
Blizzard is, in my opinion, the ‘Walt Disney of Video Games’. They combine excellent storytelling with beautifully rendered visual cutscenes and gameplay to create game worlds that are intriguing and engrossing. This is very much evident in the StarCraft and WarCraft franchises. Their recent exploits are games geared towards competitive gaming in Heroes of the Storm and Overwatch, and casual gaming in Hearthstone. These are areas that have high potential and profitability going forward, as explained later.
King Digital should be no stranger to mobile gamers from their Candy Crush and Bubble Witch Saga games. They are a mobile gaming app developer that was acquired in 2016. I was surprised at this acquisition as although I had fun with Candy Crush Saga when it was initially released, I ultimately stopped playing as I felt that clearing a stage involved way too much luck compared to skill. The only benefit was probably getting instant exposure to the mobile market, which Activision Blizzard had little exposure to at the time.
The Bull Case
Here’s my potential catalysts for the company:
Esports (shortened from Electronic Sports) is an area that is rising in popularity among gamers and the wider public. Simply put it is the professionalisation of competitive gaming, where professional gamers and teams compete with each other for a championship, very much similar to traditional sports like soccer or basketball.
ATVI is a relative lightweight in the Esports arena when compared to the juggernauts in the space – Tencent (Through League of Legends) and Valve (Through Dota 2). With that said, it has been silently acquiring Esports assets like Major League Gaming (MLG). It also has ongoing Esports tournaments for Call of Duty and to a smaller extent, Hearthstone.
In fact, ATVI began a big experiment in Esports with the recent launch of the Overwatch League for their team based shooter Overwatch. The competition format follows the NBA in some ways, with a initial round robin league phase, with the top 6 teams out of 12 qualifying for the playoffs. The playoffs uses the knock-out format until you crown the ultimate champion.
As part of this experiment, Twitch TV, a live streaming platform dedicated to video gaming, paid $90M for the streaming rights for the 1st 2 seasons of the league. The stream is presented in sports TV-like coverage complete with commentators and analysis provided by MLG.
Viewership stabilised at 60-70k daily simultaneous viewers during Week 2 of the competition, dropping from over 100k viewers during Week 1 due to initial hype, which to me is a respectable number for now.
Time will tell if this great experiment will work, but I’m betting that it will turn out fine.
2) Leveraging existing Intellectual Property assets
The company is taking a page out of Walt Disney by capitalising on its extensive IP assets to license and develop consumer products by creating a consumer products division in 2017. The consumer products division has been busy signing licensing deals for products and any licensing revenue goes straight to the bottom line.
3) Continued push into mobile
The acquisition of King was not simply to get a quick presence in mobile, it represents an opportunity for ATVI to utilise King’s mobile gaming expertise to push out mobile games using Activision and Blizzard’s the rich library of content. ATVI had already shown an aptitude at porting Hearthstone to mobile, that capability can only be augmented further by the acquisition of King.
There are currently no announced titles on this, but any game resulting from this partnership only adds to the potential upside.
But what about their competitors?
There are currently 2 listed video game publishers in the US – Electronic Arts (NASDAQ: EA) and Take-Two Interactive (NASDAQ: TTWO). However, due to the following reasons, I wasn’t very interested in them.
1) Company and Management culture
EA is the undisputed giant in the industry. That being said, I absolutely detest their management. EA’s management is responsible for single-handedly ruining games due to their constant desire to milk every ounce of revenue out of their games. They have been increasingly testing the limits of gamer patience through practices like in-game purchases and micro-transactions in paid games, and extremely buggy game releases at launch. Discussion on this topic alone can take up an entire post, so I’ll just stop there. Just know that their obscene greed has affected the way they develop their games (the most high profile example being Star Wars Battlefront 2) and I foresee doom for the company if they continue on this path.
In contrast, ATVI’s management, Blizzard Entertainment in particular, remain gamers at heart and understand the issues facing the industry. They have shown comparative restraint and attention to detail in their development of games. So far, they also have not released any game with anti-consumer features or a boat load of bugs at launch.
2) A very deep moat
One of the criteria Warren Buffett looks for in companies is a significant moat (ie competitive advantage) that stops others from easily encroaching on their space.
ATVI has, in my opinion, a very deep moat, due to years of quality game development and continued fan engagement. The best manifestation of this moat is BlizzCon, Blizzard’s annual convention.
This annual gathering is almost like a pilgrimage for Blizzard fans to share their love for the games they play. Every franchise always get some sort of announcement at BlizzCon, so its one of key events in ATVI’s calendar.
When compared to EA or TTWO, their fans just doesn’t seem to display the same fervor.
3) I just don’t play their games
Although EA owns a lot of games that I used to play ages ago (FIFA, Command and Conquer, Dragon Age), their practices is currently a big turn off for me.
As for TTWO, I’ve never played Grand Theft Auto, Red Dead Redemption or 2K Sports games and I don’t foresee myself doing so. Also as a sidepoint, TTWO has doubled in the past year and are the most expensive of the 3 stocks.
My trigger point
ATVI has spent 2H 2017 consolidating in a fixed range that only broke out after the New Year. This was due to the Overwatch League launch and broader market uptrend. I initiated a small position as a bet it will move subsequently higher and settle in a new range.
The risk is that the company’s valuation is not cheap on historical PE basis. Any weakness in any of their endeavours might cause a re-rating downwards. If that happens, I’ll be glad to add to my position if possible.