Analyst: Activision Blizzard’s 2014 Release Slate Among Its Best Ever
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Activision (NASDAQ:ATVI) reported a very strong quarter and increased full-year guidance slightly. The company delivered 19 cents in adjusted EPS compared to our estimate of 10 cents, consensus of 11 cents and guidance of 9 cents. Revenues were well above expectations, in part due to the “pulling forward” of revenues from presales of the World of Warcraft: Warlords of Draenor expansion, due later this year. The expansion included playable features that were available immediately, accelerating the recognition of what would otherwise have been deferred revenue.
We believe Activision’s release slate in 2014 is among its best ever. Blizzard has already released the first Diablo III expansion and will release the World of Warcraft: Warlords of Draenor expansion later this year. We expect each to contribute at least $200 million to revenue. In addition, Blizzard has released free-to-play Hearthstone (in April) and is expected to release Heroes of the Storm later this year.
Activision has also scheduled Destiny for a September launch. We view the game as a potential blockbuster, with as much as $500 million of sales potential in addition to DLC and Season Pass purchases. We have modeled revenue growth of over $350 million and believe sales can surpass our estimate.
The company has overcome concerns about declines for its core franchises. Skylanders withstood an onslaught from a competitive product to achieve record sales; Call of Duty sales declined only slightly and are expected to rebound this year from a stronger franchise with less competition; and World of Warcraft subscribers appear to have stabilized.
We think that brand extensions and expansion packs for Blizzard’s three core franchises can keep its revenues stable for a long time, and it may see revenue growth when it launches a new MMO, expected in 2015 or 2016. We also see a bright future for the launch of Call of Duty China, expected sometime early next year.
We are increasing our FY:14 estimates for revenue to $4,700 million from $4,650 million, and EPS to $1.30 from $1.28.
We are initiating our FY:15 estimates for revenue of $5,100 million and EPS of $1.50. Initial Q2:14 guidance is for revenue of $600 million and EPS of 1 cent.
Maintaining our OUTPERFORM and raising our price target to $30 from $22.We value the shares at an above-market multiple of 20x our 2015E $1.50 per share EPS, reflecting our view of the company’s outstanding execution and superior earnings growth.
Michael Pachter is an analyst at Wedbush Securities.
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