Activision Blizzard: Attractive Play on Video Game Cycle

Activision Blizzard, Inc. (ATVI) is a new buy for Northlake clients. Now is a good time to invest in ATVI following recently announced better than expected third quarter results. In addition, there have been concerns about growth at ATVI for 2015, but the worries seem to be easing due to the just reported better than expected sales and recent announcements about the pipeline of games in 2015. ATVI is trading at a meaningful discount to its peers. As growth expectations pick up, we believe ATVI could experience expansion in its P-E to match the industry average.

An additional positive is that there could be upside to 2015 EPS estimates as Vivendi sells the last tranche of ATVI stock it received in the sale of Blizzard to Activision. Over the years, ATVI has been opportunistically buying back its own shares, and more share buybacks could drive 2015 EPS estimates higher.

The bottom line is that Northlake has taken a new long position in ATVI at what we see as a low valuation on conservative earnings estimates. We believe that the P-E multiple could expand from 14x to 16x 2015 earnings of $1.50 per share, giving us an price target of $24, for a gain of 20%. At 16x earnings, ATVI would still trade at a discount to its closest peer, Electronic Arts, which trades at over 18x 2015 estimates presently. Should the story evolve as we expect, especially success in recently introduced games and the game releases in 2015, a secondary target in the upper $20s is achievable in the next 12 months.

The video game industry as a whole is looking strong as a new generation of game consoles has been selling briskly and well ahead of initial expectations. Gamers should now shift their spending to software for their new consoles. ATVI has a strong pipeline of next generation games to drive growth during the hardware to software shift, starting this holiday season.

Key titles include the recently released Destiny and Call of Duty: Advanced Warfare, and the upcoming expansions to World of Warcraft , Starcraft, and Skylanders. Additionally, the Blizzard unit announced their first new Intellectual property in 17 years, Overwatch. The initial beta of the game offered to attendees at last week’s Blizzcon convention has been met favorably. Another new title for 2015 that has received good buzz is Heroes of the Storm.

Overall, we believe that ATVI is well positioned for a successful holiday season and for growth in 2015 and beyond. The shares are currently undervalued with positive catalysts lined up from now through 2015.

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.