Activision Blizzard (ATVI) reported 4Q20 results roughly in line with Wall Street estimates that were above the company’s own guidance.  More importantly, management provided initial 2021 guidance that was above analyst estimates and appears to be based on conservative assumptions.  ATVI shares have been fantastic performers for Northlake over the years and had a particularly good year in 2020.  Along with other video game publishers, ATVI has been a huge beneficiary of the COVID pandemic thanks to work from home creating more time for video game play and reallocation of entertainment spending.  Investors have had concern about tough comparisons in 2021, so the guidance for a good growth year was a relief and well received with the shares jumping nearly 10% to a new all-time high. 

Northlake has raised its outlook for ATVI but even with that we have a hard time justifying a stock price much above current levels based on the 2021 outlook.  We can see a path for further upside based on potential 2022 results.  Given our long-term success with ATVI, the company’s excellent track record, and what we view as a very positive strategic shift the company made in early 2019 that has set the stage for growth over the next few years, we are going to stick with ATVI.  We may have a period of consolidation in the stock over the coming months but in the case of ATVI we think patience will be rewarded with another leg up.

We had several key takeaways from the company’s quarterly call.  First, the 2021 guidance does not include any revenues from the next versions of Diablo Immortal and Overwatch.  Previously, consensus included some revenue from these games.  With guidance ahead of expectations, this implies that management expects a big year from the newly enlarged Call of Duty (CoD) franchise and solid results from a remaster of an old version of World of Warcraft (WoW).  Second, the enlarged CoD is a big winner and a template for future game development.  Back in 2019, ATVI decided to no longer produce games in the previously popular Destiny series and instead focus on other key titles including CoD, WoW, Diablo Immortal, and Overwatch.  At the time, ATVI and other publishers were under a lot of pressure due to the popularity of Fortnite.  ATVI made the decision to narrow its focus and broaden the reach of its franchises with free-to-play and mobile games.  The company began with its most important franchise, CoD.  Success was immediate; CoD is bigger than ever with multiple revenue streams including a greater percentage of high-margin digital revenue.  The CoD playbook is now a template for ATVI’s other major franchises. 

We expect similar success in Diablo, WoW, and Overwatch to roll out in 2022 and beyond and sustain the company’s growth rate.  This is the main reason we are willing accept the possibility of a trading range in ATVI shares up and down from the new all-time highs. With 2021 looking like a growth year despite challenging comparisons, we look ahead to 2022 when ATVI should be back on its beat-and-raise game.  We can justify another 20% upside in ATVI on the assumption the company exceeds initial 2022 estimates.  Given the company’s excellent track record, we are willing to wait if patience is required.

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.