Activision Blizzard (ATVI) reported sales and earnings that were better than expected with typically conservative guidance for 4Q19. The restructuring effort underway at ATVI appears to be gaining traction as the company invests toward setting up a strong 2020. Such investments include increasing marketing spend behind successful franchises to expand the player base, developing content for existing titles at a quicker pace to drive engagement, and taking advantage of growing gaming platforms like mobile to reach a wider global audience. Northlake believes the strategic shift will continue to benefit ATVI for years to come, but investors will need to see some benefits flow through to growth in the bottom line before the stock can make the next leg higher. Analysts are expecting 2020 EPS just below $2.50, with 2021 EPS growing to $2.85, implying a price target range of roughly $50-$70 at 20x to 25x EPS. Northlake expects ATVI to eventually reach the higher end of that range and beyond as restructuring benefits lead to upside in EPS estimates.

ATVI has become smarter about optimizing developer resources and maximizing the value of their key franchises across all platforms and geographies. ATVI demonstrated the success of this approach with the Call of Duty (CoD) franchise as proof of concept. CoD Mobile is off to a hot start globally, thanks in part to the massive popularity of the franchise. The newest console release of CoD: Modern Warfare is also doing well so far with big expectations for the long-term success of the title. ATVI is also launching an esports league for CoD in January with 12 teams already on board. ATVI’s World of Warcraft (WoW) franchise is another good example of maximizing the value of existing intellectual property. WoW Classic recently demonstrated the strength of the old library content as well as the engagement benefits for newer expansions of the franchise by reactivating lapsed players.

While the Activision and Blizzard segments restructure to focus on maximizing the growth of owned intellectual property, the King Digital segment in mobile gaming remains strong. Digital ads almost doubled over the same period last year and are starting to contribute meaningfully to financial results after ramping for the last couple years. The base of advertisers and players are both growing, and new games could accelerate this growth down the road. In the meantime, the Candy Crush franchise will remain a growth driver for ATVI.

In summary, ATVI is starting to demonstrate the benefits of recent restructuring efforts, but investors will need to see these benefits flow through to the bottom line in 2020 and beyond to achieve the substantial upside Northlake expects toward $70+. ATVI is taking best practices from across the industry, including more live operations like mobile peer Zynga, more cross-platform and “Battle Royale” game modes like competitor Fortnite, more esports leagues after leading the way with Overwatch League and the coming CoD League, and more mobile games and advertising as the King segment expands. The stock is not cheap and upside could take some patience, but returning to growth with a strong pipeline, a deep content library, and a good management team leave Northlake excited about ATVI’s prospects for 2020.

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. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.