Activision Blizzard (ATVI) reported strong 3Q20 earnings driven by its Call of Duty franchise.  Revenues and earnings were above management guidance and the even higher analyst estimates.  Management raised the 2020 outlook, and initial comments on 2021 suggest management believes earnings can grow against the tough 2020 COVID-boosted results.

Over the summer, we made sales in ATVI across the Northlake client base to right size the position.  ATVI shares reached an all-time high in the fall of 2018 and then lost about half their value as growth forecasts slowed.  ATVI management addressed the growth challenges by focusing game development efforts on key franchises including Call of Duty, World of Warcraft, and Candy Crush. These efforts paid off handsomely in 2020, especially at Call of Duty, where expansion of the franchise into the battle royale mode – popularized by Fortnite – and a mobile game version proved very popular and profitable.

ATVI shares held up relatively well during the bear market in 1Q20 and then steadily recovered as investors focused on industries that would benefit from stay-at-home orders.  ATVI results did surge in 2Q20 and the stock returned to 2018 highs in July.  At that time, we felt the valuation was stretched and with position sizes above our targeted levels, we made small sales across the Northlake client base.

Four months later, the company has reported two consecutive quarters above analyst estimates and raised guidance considerably.  Despite the good news, ATVI shares remain about 5% below our sale price.  We feel good about our decision to right size the position and we are now more optimistic that ATVI can push to meaningful new highs in 2021. 

Historically, ATVI shares often have a lull during the holiday season until the company provides detailed guidance for the year ahead when it reports 4Q results at the end of January.  On the 3Q20 call, management took the opportunity to note that they anticipated growth in 2021.  This is important as ATVI faces very challenging comparisons in 2021.  In addition, there remains uncertainty about the ability to deliver the next release in the important Overwatch franchise due to COVID delays in game development.  Fortunately, the Call of Duty franchise is stronger than ever with its successful expansion into battle royale and mobile.  Furthermore, King’s Candy Crush games continue to sustain top 10 performances.  World of Warcraft also has sustained the revitalization seen over the last few years.  Overall, ATVI’s decision to exit the Destiny franchise and focus its resource on the company’s most important games appears to be paying off.

ATVI more than passed though the 3Q20 EPS beat to full year guidance.  The street still expects a beat vs. guidance and EPS near $3.50 in 2020.  If there is growth in 2021, ATVI shares are trading at just a little over 20 times earnings, only a modest premium to the S&P 500.  Growth in 2021 against the tough comparison should reassure investors about ATVI’s long-term strategy and opportunity.  In addition, a good 2021 will show that the COVID boost to 2020 results supports a larger long-term opportunity rather than a pull forward of growth.  This is Northlake’s expectation and if it occurs ATVI shares can move into the $90s, providing upside of 20% over the next twelve months.

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.