Activision Blizzard (ATVI) reported good quarterly results that beat investor expectations, while raising guidance for the fourth quarter. The stock reacted with a mild selloff, as the increased fourth quarter guidance did not quite meet Street expectations. Aside from the slightly conservative fourth quarter guidance, ATVI appears to be on track to benefit from several secular tailwinds, including the growth of higher-margin full-game digital downloads, rising popularity of mobile gaming and related digital advertising driven by the recent acquisition of King Digital (KING), and the increasing viewership and participation in professional e-sports. In total, we believe that solid execution from ATVI will continue to drive the shares higher into the upper-$40’s.

Player engagement remains incredibly strong, with more than 500 million monthly active players across the company’s various games playing more than 10 billion hours in the third quarter alone. Recent game launches such as Overwatch and World of Warcraft: Legion have been well received. Destiny remains very popular, and ATVI plans to build on that success with expansion packs and another full-game release.

Investors and gamers are anticipating the release of the newest installment in the Call of Duty franchise, subtitled Infinite Warfare. Importantly, ATVI and analysts are already assuming conservative unit sales figures for the game, partially offset by a higher average sales price than previous versions due the availability of better bonus content. This year, gamers can purchase the “Legacy Edition” of Infinite Warfare, which includes a remastered version of the massively successful Call of Duty: Modern Warfare for an extra $20.

ATVI is progressing on integrating the recent KING acquisition. Over the last three months, ATVI has been testing digital ads in KING’s mobile games. Although company guidance does not account for any benefit from the sales of mobile game ads, this is a significant growth opportunity. During the third quarter conference call, ATVI announced that they now expect mobile ads to begin to contribute to earnings in FY17. We believe that mobile ads will contribute substantially to ATVI earnings in FY18 and beyond.

ATVI has been a big winner for Northlake, and we expect it to continue to move higher as the company executes on its plans and benefits from the several secular tailwinds discussed above. In the near-term, we expect the shares to move towards the upper-$40’s, with more potential long-term upside driven by growth in digital ads and e-sports.

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.