Activision Blizzard: These Catalysts Could Lead to Stock Multiple Expansion

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.  

Activision (NASDAQ:ATVI) Q4 beat driven by  Call of Duty and Skylanders.  Revenue was $2.60 billion, compared with our estimate of $2.45 billion, consensus of $2.44 billion, and guidance of $2.41 billion. EPS was $0.78, compared with our estimate of $0.72, consensus of $0.72, and guidance of $0.70.

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Activision delivered yet another year of solid growth. Once again, Activision delivered both top and bottom line growth, as Call of Duty Black Ops II sales were relatively flat compared to Modern Warfare 3 sales last year. Growth came from the outstanding performance of Skylanders Giants, with particularly strong sales of toys. Blizzard seems to have stabilized its World of Warcraft subscriber base, and upside from Blizzard allowed Activision to again achieve record sales and earnings.

Management provided conservative FY guidance for revenue of $4.175 billion and EPS of $0.80. Full year guidance assumes a significant drop-off for Blizzard revenue, with two releases in 2013 (the first  StarCraft II expansion and an unnamed title) expected to underperform 2012’s Diablo III and Mists of Pandaria. In addition, the company expects Call of Duty sales to decline.  Guidance does not include…

the Bungie release or Call of Duty Online in China. Management is also wary of the ongoing console transition’s impact on results.

We are decreasing our 2013 estimates for revenue to $4.74 billion from $4.90 billion, and for EPS to $1.05 from $1.12 to reflect conservative guidance, but we still believe that there is significant upside to guidance.

We continue to believe that the company has many positive catalysts that could lead to multiple expansion. These catalysts include: (1) a clearer picture of the company’s future from the statements or actions of Vivendi’s management or from any changes to the balance sheet, (2) year-over-year growth from Call of Duty catalog sales (packaged goods and DLC) over the next quarter from a free Eliteservice, (3) continued strong catalog sales of Skylanders Giants toys, (4) a firming up of the 2013 release slate, (5) continued stability for World of Warcraftsubscriptions, and (6) continued margin expansion from digital sales.

Maintaining our OUTPERFORM rating and $19 price target, which reflects a forward multiple of ≈ 13x our 2013 EPS estimate of  $1.12 plus $4/share in cash. This is a discount to the market multiple due to weak investor sentiment towards the video game industry, which is suffering from packaged goods declines.

Michael Pachter is an analyst at Wedbush Securities. 

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