Activision Blizzard (ATVI) reported a second straight quarter of sales, earnings, and forward guidance above consensus estimates. Strength in the quarter was largely attributed to the successful launch of Blizzard’s newest game, Overwatch, which already has over 15 million players globally. Continuing momentum across key franchises, signaled by strong pre-orders for the next expansions of World of Warcraft and Destiny, give us confidence that ATVI can surpass its typically conservative guidance for the remainder of the year, pushing the stock into the upper-$40’s.

One area of concern from the report is that pre-orders for the next installment of Call of Duty (CoD), titled Infinite Warfare, are tracking below the pace from last year. ATVI management attributes this to a delayed marketing plan, insisting that the outlook for the new release and the entire CoD franchise is stronger than ever. We believe the lowered expectations create an opportunity for upside as ATVI drives awareness of the new release through their marketing plan and eSports competitions. Additionally, Infinite Warfare will launch with a remastered version of 2007’s massively popular Call of Duty 4: Modern Warfare for an additional $20, possibly leading to a higher average sales price compared to previous CoD titles.

ATVI has several other potential drivers of upside. First, we expect improved profitability driven by the ongoing transition to digital game downloads instead of physical game discs. Second, the acquisition of King Digital Entertainment (KING) opens the door for new revenue streams such as advertising on mobile games and creates a path to monetizing popular ATVI intellectual property similar to the recent success seen by Niantic’s Pokémon Go app using Nintendo’s intellectual property. Third, ATVI is beginning to monetize its franchises through films and TV series, which dual as a marketing tool. Fourth, ATVI is making a strong push to become the global leader in eSports by putting its popular competitive games on display on a new eSports network. Fifth, global distribution expansion represents a large opportunity for growth, and early success can be seen in important markets such as China.

In summary, we continue to believe that the combination of conservative guidance, solid execution, and several underappreciated opportunities to drive long-term growth and profitability leave ATVI shares well-positioned to climb into the upper-$40s.

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 positions 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.