Activision Blizzard (ATVI) reported better than expected 2Q20 earnings, beating on both the top and bottom line.  EPS of 97 cents crushed the consensus of 69 cents.  Despite the 28 cent beat, management raised 2020 guidance by 45 cents to $3.05.  Management showed a high degree of confidence in trends for the rest of 2020 by passing through more than the quarterly EPS beat to guidance.  This is important because video games have been among the biggest COVID winners as people stayed at home and played video games in lieu of other entertainment options (e.g. concerts, movies, casino trips, eating out).

Most parts of ATVI performed well in the second quarter but the big driver of results and the stock story has been the launch of a free-to-play version of Call of Duty called Warzone.  The game has been very well received and extends and defends the CoD franchise into and from the Fortnite driven free-to-play universe.  The game quickly has grown to 75 million registered users driving overall ATVI monthly active users up 3X in the quarter.  Also supporting the strong results was World of Warcraft and King’s mobile games, most notably the Candy Crush franchise.

During the quarter, Northlake trimmed large client positions in ATVI as the stock crossed into the $80s reaching prior all-time highs and achieving a price target we had recalibrated over the past six months.  The shares now trade at 27X earnings, a lofty level historically.  However, the market’s P-E multiple has also expanded and on a relative basis the shares are not horribly expensive.  Northlake believes that the impact of the virus will be sustained well into 2021 or until a vaccine is both widely available and widely deployed.  We expect ATVI’s current momentum to slow but continue at least into 1Q21 before comparisons get more difficult.  We still see upside to 2020 estimates and more so in 2021.  Current consensus in 2021 calls for no growth against the pandemic boosted 2020.  We think ATVI can still grow and believe EPS of $3.50 is realistic.  Maintaining the current P-E of 27 leads to a target of $95 in the first half of 2020, enough to continue holding our now right-sized holdings in ATVI.

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.