Play­ing the game and win­ning

The rise of the gam­ing in­dus­try has taken many in­vestors by sur­prise. Nas­daq-listed Ac­tivi­sion Bliz­zard has be­come one of the most suc­cess­ful in the in­dus­try and is a great bet for in­vestors.

Finweek English Edition - - MARKETPLACE - Editorial@fin­ is di­rec­tor at Capilis As­set Man­agers.

ne of the most suc­cess­ful stand­alone in­ter­ac­tive en­ter­tain­ment com­pa­nies in the world, Ac­tivi­sion Bliz­zard (ATVI), has been grow­ing at a fre­netic pace and is poised for suc­cess on mul­ti­ple fronts.

Head­quar­tered in Santa Mon­ica, Cal­i­for­nia, the com­pany’s port­fo­lio in­cludes some of the strong­est en­ter­tain­ment fran­chises, in­clud­ing Ac­tivi­sion Pub­lish­ing, Bliz­zard En­ter­tain­ment and King Dig­i­tal En­ter­tain­ment, which de­vel­ops, dis­trib­utes and pub­lishes block­buster gam­ing fran­chises like Call of Duty, War­craft, Star­craft, Di­ablo and the ever-pop­u­lar Candy Crush.

The rise of the gam­ing in­dus­try has been swift and un­fore­seen (by most in­vestors), mainly due to struc­tural changes, so­ci­etal adop­tion and tech­no­log­i­cal ad­vances over the last cou­ple of years. The rise of smart­phones and the use of them by, specif­i­cally, mil­len­ni­als can take most of the credit for the cre­ation and size of the cur­rent gam­ing in­dus­try.

We ex­pect the fol­low­ing growth driv­ers to con­tinue boost­ing prof­its:

1. Mo­bile 2. Gam­ing con­soles 3. Dig­i­tal dis­tri­bu­tion 4. Down­load­able con­tent (DLC) 5. Mi­cro­trans­ac­tions Re­cent re­sults for the first quar­ter of the year beat ex­pec­ta­tions, with sig­nif­i­cant rev­enue and earn­ings per share (EPS) growth. Yearon-year non-GAAP rev­enue in­creased 29% to $908m ver­sus ex­pec­ta­tions of $812m. EPS grew 44% to $0.23. The ex­pected growth in mo­bile, through the ac­qui­si­tion of King Dig­i­tal, is start­ing to bear fruit – mo­bile now con­trib­utes 26% of rev­enues ver­sus 12% a year ear­lier. This has been a large fo­cus as mo­bile games have a smaller time com­mit­ment than other con­ven­tional PC and con­sole games, and are also more af­ford­able to the av­er­age per­son. Cheaper games equate to a large vol­ume of users in a mar­ket that is yet to be fully un­locked. It is im­por­tant to note that the over­all gam­ing mar­ket is grow­ing at a steady pace, and although mo­bile is can­ni­bal­is­tic, it is bring­ing new ca­sual users into the in­dus­try.

Apart from its re­cent push to mo­bile, ATVI has been proac­tive in ad­dress­ing the op­por­tu­nity of the lat­est craze, eS­ports. eS­ports are large events where teams/ play­ers play against one an­other in front of a crowd. These events are viewed as en­gage­ment driv­ers, draw­ing mil­lions of on­line view­ers, and sells out large sta­di­ums like Madi­son Square Gar­den. The more peo­ple watch these events, the more they want to be­come in­volved, spurring on more en­gage­ment and more rev­enue gen­er­a­tion po­ten­tial. eS­ports are thus seen as in­di­rect rev­enue gen­er­a­tion op­por­tu­ni­ties.

All the growth driv­ers men­tioned cre­ate a “syn­thetic sub­scrip­tion ser­vice”. His­tor­i­cally the rev­enue model was sin­gu­larly trans­ac­tional, as a game was bought and played, with no other trans­ac­tions tak­ing place in-be­tween game re­leases. This cre­ated cycli­cal­ity, which was not ideal. Now, dig­i­tal dis­tri­bu­tions and DLC are driv­ing eas­ier trans­ac­tions, but these are no longer sin­gu­lar as the trans­ac­tions and “add-on ser­vices” be­come more fre­quent. The cycli­cal­ity fac­tor is also smoothed out, cre­at­ing more con­sis­tent rev­enue streams and bet­ter profit mar­gins.

The share has had a tremen­dous run over the last year and cur­rently trades at an ex­pected for­ward price-to-earn­ings ra­tio (P/E) of 16.7 times. Given that growth is ex­pected to re­main be­tween 20% and 30%, this mul­ti­ple doesn’t seem too steep and should re­ward in­vestors hand­somely over the long term.

The rise of the gam­ing in­dus­try has been swift and un­fore­seen.

The game is dis­played on an iPhone.

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