Activision Blizzard (ATVI) bounced back from a disappointing end to 2015 with a strong beat on sales and earnings in the first quarter of 2016. ATVI also increased guidance for 2016. Based on the first quarter and management commentary on the conference call, we believe analyst estimates could be revised higher throughout the year as ATVI executes on its plan, leading the stock to rise to the low-$40’s.

The successful quarter was driven by continuing strength in its key franchises, especially Call of Duty, World of Warcraft, and Destiny. ATVI has benefitted from a focus on keeping users playing and paying with add-on downloadable content between major franchise upgrade cycles. The quarterly results also demonstrated progress on the integration of recently-acquired King Digital Entertainment as ATVI moves to unlock significant upside in mobile gaming and advertising.

Looking forward, ATVI has some exciting product launches coming soon that should continue to drive strong results. Overwatch, a new Blizzard franchise with a creative twist on the first-person shooter genre, will launch on May 24^th, 2016. Expectations are high for Overwatch, with some believing the launch could rival the massively successful launch of Destiny last year or Diablo III in 2012. More importantly, ATVI sees Overwatch as a key franchise going forward with long-term potential to grow the user base and create eSports offerings. Excitement is also starting to build for the releases of the World of Warcraft: Legion expansion at the end of the summer and the next iteration of Call of Duty: Infinite Warfare in the winter.

In summary, we believe that conservative guidance, solid execution, and several underappreciated opportunities to drive long-term growth and profitability leave ATVI shares well-positioned to climb into the low-$40’s. Long-term opportunities in advertising, eSports, video content production, and the shift to digital video game downloads each contribute extra optionality for the shares to outperform.

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.