Activision Blizzard (ATVI) beat estimates for 2Q18 sales and earnings, but provided mixed guidance commentary for the back half of the year. Guidance for the third quarter was well below expectations, partially due to increased marketing expenses ahead of a busy and highly competitive holiday season launch slate. Full year guidance was increased but remains slightly below street expectations. The typically conservative guidance from ATVI helps keep street expectations in check and sets ATVI up to outperform in the coming quarters. The stock reacted negatively to the underwhelming guidance, but Northlake remains positive on ATVI with upside to $80 as investors begin to focus on 2019 EPS of $3.20. Our confidence is bolstered by the vast and growing library of successful franchises, each of which appears to be executing at a high level quarter after quarter.

ATVI has several major upcoming game launches throughout the rest of 2018, including large expansions for Hearthstone, World of Warcraft (WoW), and Destiny 2 (D2), the next iteration of Call of Duty (CoD), and a to-be-announced new mobile game from King based on an existing popular franchise. Consistently strong engagement across ATVI’s portfolio of lasting franchises demonstrates the value of the company’s intellectual property and the ability to please each community of gamers year after year. For context, the original version of CoD launched in 2003, WoW launched in 2004, and Hearthstone and Destiny were both launched in 2014.

CoD: Black Ops 4 will be released on October 12^th, kicking off three weeks of highly anticipated game launches including Battlefield V from Electronic Arts on October 19^th and Red Dead Redemption 2 from Take-Two Interactive on October 26^th. Expectations are justifiably high for CoD into a competitive environment, since the Black Ops variant has been the most popular version to date and pre-orders have reportedly been strong. Despite CoD: Black Ops 3 being released in 2015, management noted that monthly active users grew from last quarter in anticipation of the next version. Northlake believes CoD will exceed elevated expectations, especially given the new “battle royale” mode which should help attract new younger players to the franchise, since recently popularized “battle royale” games like Fortnite and PlayerUnknown’s Battlegrounds have been popular among gaming neophytes. As a final note on the bright future for the CoD franchise, ATVI and Tencent announced they would be developing and launching a mobile version of the game in China.

ATVI just wrapped up the inaugural season for the Overwatch League (OWL) with the broadcast of the grand finals on ESPN. The first season was a success for the 12 teams and several sponsors including Toyota. ATVI announced two new teams – Atlanta and Guangzhou – would be joining OWL with more teams to be announced later this year. While esports are still growing in popularity and may take time to become more mainstream, ATVI has now built the framework to develop more leagues for other successful franchises including CoD.

With practically every aspect of ATVI’s business seemingly firing on all cylinders, Northlake remains excited about the bright future ahead for shareholders. All three segments – Activision, Blizzard, and King Digital – boast many franchises that continue to build strong player communities year after year. Underappreciated opportunities in areas including esports and mobile advertising are just beginning to be tapped. Northlake continues to expect ATVI to move to $80 as 2019 EPS estimates to increase toward $3.20.

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.