When Activison Blizzard (ATVI) last reported, we noted that the stock looked fully valued but the company’s excellent track record, recent business strategy enhancements, and potential for positive surprises left us willing to wait out a period of lesser stock performance.  1Q21 was a big step in the right direction with ATVI easily beating Wall Street estimates and increasing 2021 guidance.  The stock is initially responding positively, something that has not always been the case when growth companies report earnings this quarter.  We still think ATVI shares need some time before the next leg higher, but 1Q21 results increase our confidence that material share gains from current levels will occur within the next twelve months.

Key to ATVI’s current and future success is the strategy to narrow its focus on its most successful game franchises. Call of Duty is proving the strategy with great success in mobile and synergy between mobile, console, and online game play.  ATVI will follow a similar strategy at its other key franchise including World of Warcraft (WoW), Diablo, and Overwatch.  WoW is already benefitting from increased focus and investment, growing solidly despite the lack of major new gameplay.  Diablo remains on track to launch on mobile, console, and online in the second half of 2021. Success at Diablo should fully validate ATVI’s strategic pivot and we are optimistic after reading positive commentary concerning alpha and beta versions of the games.  Overwatch remains a question as news flow has been sparse and the lead manager of the franchise recently left the company.  Overwatch becomes more important in 2022 and 2023.  Management remains publicly confident in the franchise despite investor concern.

ATVI also has a huge mobile gaming winner in Candy Crush.  The King acquisition was completed in 2016 and has proven to be smart.  Candy Crush has sustained its spot at the top of mobile game rankings, and mobile gaming has grown steadily around the world.  When King was purchased, there was great optimism about advertising within the game.  This revenue stream finally appears to be a reality, setting up Candy Crush and ATVI’s other mobile gaming activities for accelerating growth in a very high margin revenue stream.

While there are clear signs of fundamental momentum across ATVI, uncertainty about tough comparisons to 2020’s shelter-in-place boom is holding back the stock.  1Q21 results and management commentary give us confidence that the company will be able to grow over the balance of 2021.  In a show of confidence, management passed through a material portion of the 1Q21 earnings beat to full-year guidance.  ATVI has a history of beating in 1Q but not raising guidance.  Furthermore, ATVI announced an acceleration in hiring of game developers to reinforce its strategy of focusing on key franchises.  New employees come at a cost but the company still felt confident to raise full year guidance.

ATVI shares currently trade at a P-E multiple that is inline with S&P 500.  Historically, the shares trade at premium.  Increased guidance still implies a sharp slowdown in growth in 2H21, so investors are not yet willing to pay a premium for ATVI’s currently elevated financial performance.  The latest earnings report gives us confidence that later this year investor confidence will grow and ATVI will return to its premium valuation on 2022 earnings estimates.  At 25 times next year’s expected earnings, we see upside to $115 for a gain of 25%. We are happy to wait.

 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.