Media Talk

Relief Rally Pushes Activision Blizzard to Record High

Activision Blizzard (ATVI) reported strong sales and profits with FY17 guidance modestly below Street expectations. It appears the conservative guidance was better than most investors expected, as ATVI rallied almost 19% to a new record high of $47.64. ATVI remains on track to benefit from several secular tailwinds, including the growth of higher-margin full-game digital downloads with add-on content, rising popularity of mobile gaming and related digital advertising after integrating the company’s acquisition of King Digital (KING), and growing engagement with e-sports.

Strength in the fourth quarter was driven by ATVI’s increasingly diversified portfolio of major franchises including Overwatch, World of Warcraft, and Destiny, offsetting the underperformance of Call of Duty: Infinite Warfare. Measuring units sold of each new game is becoming less relevant to ATVI’s success as add-on content downloads and micro-transactions become larger contributors to earnings.

Looking forward, we see untapped potential from the KING acquisition, e-sports, consumer products, and other new media initiatives. KING continues to test digital advertising, and is developing new content using ATVI’s existing intellectual property. Mobile game ads should be a positive contributor to FY17 earnings, and should contribute materially to FY18 earnings. E-sports continues to grow in popularity, and ATVI is well positioned to benefit from the trend. ATVI is also undertaking new initiatives in consumer products and TV/film that should boost growth further.

In summary, ATVI continues to be a big winner for Northlake. Although the recent surge post-earnings might limit the immediate upside, we believe the move higher is fully justified. With the conservative FY17 guidance announcement leading to a relief rally, we expect the next major catalysts to be related to the launches of Destiny 2 and the next Call of Duty title later in the year. We believe that ATVI can continue to move higher as these catalysts near and into the mid-$50’s as investors look towards strong earnings growth potential in FY18.

ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  ATVI is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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