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Activision Blizzard Pitch
Activision Blizzard
Sector Manager: Conor Davis
Senior Analyst: Anna Kylkilahti
Analysts: Michael Moyles, Robertas Rimkus
T R I N I T Y S M F
Summary of Investment Thesis
• Track record of consistently acquiring and maintaining highly profitable video
game franchises
• Acquisition of King to provide mobile potential for established Activision
Franchises
• Expansion into unconventional markets to unlock additional revenue streams
• Shift from physical to digital sale of video games to increase margins
• Increasing adoption of next-gen consoles should boost growth
Company OverviewT R I N I T Y S M F
T R I N I T Y S M F
Introduction: Company Snapshot
Recommendation BUY
Current Price £16.69
Price Target £21.66
Upside 29.7%
Timeline 3/4 years
Market Cap. £103.359B
52wk range $18.55-$37.51
P/E 24.9
Div. Yield 0.6%
FCF Yield 5.57%
Analyst Consensus BUY-50
0
50
100
150
200
250
30
/11
/20
12
31
/01
/20
13
31
/03
/20
13
31
/05
/20
13
31
/07
/20
13
30
/09
/20
13
30
/11
/20
13
31
/01
/20
14
31
/03
/20
14
31
/05
/20
14
31
/07
/20
14
30
/09
/20
14
30
/11
/20
14
31
/01
/20
15
31
/03
/20
15
31
/05
/20
15
31
/07
/20
15
30
/09
/20
15
ATVI
Nasdaq
Graph of Percentage Price Change versus Date, Nov 2012 – Nov 2015
T R I N I T Y S M F
Business Overview
• The company develop games across the mobile,
console and PC platforms
• 5th largest gaming company in 2014
• Expected growth in mobile division with their $5.9
billion acquisition of Kings Inc.
• Increase in digital downloads will increase margins as
the need for CD manufacturing and distribution is
decreased • Focus on publishing fewer, more focused
blockbuster titles
• Formation of Activison Blizzard Studios will develop
“Skylander Academy” and a Call of Duty series
• Legendary Pictures developing Warcraft to be
released next summer along with upcoming
expansion pack
• This may help stimulate growth in this once
popular game
• Recent expansion in toys and movies
53%37%
10%
9 Months Ended 30 September
NorthAmerica
Europe
Asia
27%
14%
14%8%4%
2%
7%
5%
6%
13%
Est. Revenue by Franchise 2016 ($mm)
Call of Duty
Density
World of Warcraft
Skylanders
Overwatch
Call of Duty (China)
Hearthstone
Heors of the Storm
Other PC
T R I N I T Y S M F
Management
• Robert Kotick – President & CEO
• More than 25 years of experience with approximately 175 million shares
• Longest serving CEO of any public technology company
• Dennis Durkin – Chief Financial Officer
• Has been the CFO since 2012 and prior he worked as the corporate vice president of Microsoft’s
interactive entertainment business
• Brian Hodous – Chief Customer Officer
• Became CCO in 2008 in connection with the Activision merger with Viendi Games
• Michael Morhaime- Chief Executive Officer of Blizzard
• Co-founder of Blizzard and became CFO during the Viendi Games merger
• Thomas Tippl – Chief Operating Officer
• Has been COO since 2010 and prior to this he was CCO & CFO
• Nick van Dyk – Co-Head Activison Blizzard Studios
• Former Senior Vice President of Corporate Strategy at The Walt Disney Company
Company OverviewT R I N I T Y S M F
TRINITY SMF
Industry & Competitive Positioning•Main Competitors: Blockbuster games
•EA
EA's sport and racing games are not a direct threat to Activision, however Battlefield is a direct competitor
to Activision’s cash cow Call of Duty, and Star Wars and Titanfall are aimed at the same market as ATVI's
game Destiny.
We believe Activisions outperforms in customer retention and reputation, and in having its own standalone
franchises.
•Ubisoft
Has three major continuing franchises – the Tom Clancy series, Assassin’s Creed and Farcry. Ubisofts
games can credibly compete with Activision's but as a smaller company it is unlikely to match its ability to
continuosly bring forward new succesful franchises.
•Take-Two Interactive
Take-Twos franchises include: Grand Theft Auto, NBA and Borderlands.
•Industry and Trends
•->A huge industry of $91.5 billion in revenue (NewZoo)
•->Growing mobile game industry , mobile gaming becoming more and more attractive , yet most
of the revenue growth comes from Asia which might prove difficult to enter
•->Economy and Consumer confidence seems to be picking up , this means that more money is
going to be spent on entertainment as it tends to be the main spending of discretionary income ,
gaming industry is set to benefit.55% of Activision’s revenue comes from North America whose
consumers are
•->Video game industry is getting huge exposure through competitive and non competitive
gaming events such as E3 and Gamescom , World Championships in League of Legends ,
Counter Strike and DoTA.
•Activision recent news
•-> Outperformed expectations in both revenue and net income of 3rd Quarter
•->Announced Acquisition of King Inc. ( to be discussed in detail)
•->Main Cash Cow ‘’ Call of Duty’’ still popular , providing $550 million in revenue in the first week
of sale
•->Dividends Grew more than usual , by 3 c instead of 1c compared to the last few years.
Digital sales
•Digital sales are a new trend which let’s users to directly download games without any need of hardware discs. This cuts out retailers and increases profit margins for publishers from 65% up to around 85%•Digital Game Sales grew by 11% this year , while digital console games sales grew by 29%•Activision reported that more than half of their revenue comes from digital sales and that figure is due to increase year on. 55% digital sales reported in Q2 of 2015•3 out of 5 biggest game publishers earn more from digital sales
Mobile Games Industry
•Estimated revenue from mobiles games in 2014 were $25 billion (NewZoo) that’s a 40% rise compared to $17 billion in 2013•Estimate of 2015 revenues are $29 billion (digi-capital) $30 billion (NewZoo)•Mobile game market expected to grow by around 17% year on year•Biggest market at the moment is Asia with over $12.5 billion in revenue followed by NA with $5 billion and Europe with $3.2 billion (figures from 2014)•While markets in the west are starting to mature , Asian markets continue to grow and thrive in the mobile game sector.
Financial OverviewT R I N I T Y S M F
T R I N I T Y S M F
Income Statement
• Decide on the lines that are important from the statement. The lines included below are only a suggestion
• Include ratios and metrics that measure the financial standing of the company
• Should be brief and easy to understand, do not put the entire statement here
2014A 2015E 2016E 2017E
Revenue $4,408M $4,665M $6,560M $6,853M
Revenue Growth -3.82% 5.4% 40,6% 5,17%
Operating Income $1,183M $1190M $1768M $1967M
Net Income $835M $912M $1260M $1520M
EPS $1.13 $1.38 $2.12 $2.25
EPS Growth 18.95% 22.12% 53,62% 6,13%
DPS $0.20 $0.23
DPS Growth 5% 15%
T R I N I T Y S M F
Balance Sheet & Cash Flow Statement
2014A $ in mil. 2015E $ in mil. 2016E $ in mil. 2017E $ in mil.
Cash and Equivalents 4848 5412 6632 7882
Total Assets 14746 15401 16811 18092
Total Debt 4324 4028 6320 5978
Total Liabilities 7513 7306 7687 7815
Shareholders Equity 7233 8095 9124 10277
Cash Flow Operations 1292 1349 1400 1440
Capital Expenditure -107 -96 -103 -106
Free Cash Flow 1185 1246 1312 1370
Summary Using TTM Figures
Total Revenue $4,887 M up $480M compared
to 2014
Gross Margin 65.7%
EBITDA $2030 M up $500Mcompared to 2014
EBITDA Margin 26.74 up 4% from 2014
ROE/ROA 14.63/7.78 up 2%each from 2014
EPS Current $1.49 upfrom $1.13
compared to 2014
Total Debt $4028M P/E 25.1 compared to 34.7 industry Avg
Total Debt/Equity 0.51 Div. Yield 0.61% , $0.23
T R I N I T Y S M F
Debt Analysis
• $4028M long term debt , planning to borrow another 2.3 billion to fund the acquisition of King Inc. in Q2 of
2016
• $1.9 billion from a term loan
• $1.5 billion senior notes at 5.625% due in 2021
• $750 million senior notes at 6.125% due in 2023.
• With large revenues and with the addition of King Inc., ATVI is in a good position to repay its debts at a steady
pace
ValuationT R I N I T Y S M F
T R I N I T Y S M F
Valuation
Name P/E FwdP/E
EPS Gr. 2015
EPS Gr.2016
Div Yield Div. Cover ROE EBITDA Mkt. Cap
YTD. Perf
ActivisionBlizzard
24.9 23.6 (14.9%) 23.6% 0.6% 14.61% 1.53B 27.23B 84,81%
EA 27.3 19.5 0% 13.43% N/A N/A 28.85% 1.14B 21.41B 46.49%
Disney 23.47 20.45 10.10% 9.7% 0.9% 3.36% 15.58B 187.83B
24.62%
Ubisoft N/A 22.45 N/A 18% N/A N/A (0,03%) (90.96M) 2.92B 76.49%
Take Two Interactive
N/A 20.75 (52.97) (41.92%) N/A N/A 7.76% (144.68M)
3.00B 26,22%
T R I N I T Y S M F
Implied Multiples Valuation
Metric Median Industry Value
Implied Price
P/E 25.54 38.16
FWD P/E 25.4 33.65
P/B 4.70 51.30
Average Price $41,03(+10.32%)
EV/EBITDA Model
EBITDA: 1,354B Low Base High
EV/EBITDA 26.73 29.7 32.67
EV 36.192,42 40.213,80 44.235,18
+ Cash 6.326
- Debt 7.209
Value of Equity 35.309,42 39.330,80 43.352,18
No. Shares 731.184M
Per Share Value (£) 48.29 53.72 59.29
Potential Upside 29.67% 44.35% 59.21%
T R I N I T Y S M F
Football Field Valuation
50%Implied multiples
$41.03
30%EV/EBITDA
Low
10%EV/EBITDA
Base
10% EV/EBITDA
High
= 46.258 (+24,34%)
RiskT R I N I T Y S M F
T R I N I T Y S M F
Qualitative Risk
• The release of Fallout 4 by Bethesda may have stunted the sales of Call of Duty: Black Ops 3 in the American
market
• The high cost of DLC for Destiny annoyed their customers
• Star Wars: Battlefront will take away from some major titles
• Risk involved with the acquisition of Kings Inc.
• Failing recently due to the decreased popularity of Candy Crush
• Many see it as a positive to acquire King as it has 500 million users and with Activison’s brands they will
have a new inflow of content, yet with declining revenues and popularity of King’s games, acquiring King
may cause problems for Activision
• Investment into Activison Blizzard Studios and the move towards cinema with Warcraft can be cause for
concern as pervious video game companies ventures into cinema have failed, e.g. Nintendo
• Economic growth in the US will increase consumer discretionary income, the entertainment industry will feel
the benefit of this. The gaming market should in turn see increased revenues and with Activision as the 5th
largest in the industry it is set to benefit
T R I N I T Y S M F
Portfolio Positioning & Current Holdings
• Fits in with the SMF outlook that is bullish on the US consumer sector
• Diversifies away from a significant exposure to the Chinese market
• Divests risk away hardware
T R I N I T Y S M F
Summary of Investment Thesis
• Track record of consistently acquiring and maintaining highly
profitable video game franchises
• Acquisition of King to provide mobile potential for established
Activision Franchises
• Expansion into unconventional markets to unlock additional revenue
streams
• Shift from physical to digital sale of video games to increase margins
• Increasing adoption of next-gen consoles should boost growth
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