Company Overview: Activision Blizzard, Inc. (NASDAQ: ATVI) is engaged in developing and publishing interactive entertainment content and services on video game consoles, personal computers (PC) and mobile devices. Its operating segments are 1) Activision Publishing, Inc., whose key product offering includes the Call of Duty League activities; 2) Blizzard Entertainment, Inc., which maintains an online gaming service, Blizzard Battle.net, that allows for the digital distribution of Blizzard and Activision games, online social networking, and the development of user-generated content; and 3) King Digital Entertainment, whose product franchise is Candy Crush.

ATVI Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Double-Digit Growth in Revenue: In Q2FY21, the company's total revenue amounted to USD 2.30 billion, representing an 18.84% increase year-over-year from USD 1.93 billion.
• Improvement in Operating Margin: ATVI reported an operating profit of USD 959 million for the current quarter, representing a higher operating margin of 41.8% vs. 38.8% for Q2FY20, attributable to a lower total operating expense ratio.
• Surge in Net Income: The net income for Q2FY21 was USD 876 million vs. USD 580 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.12.

Revenues & Operating Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On September 23, 2021, ATVI announced the release of Diablo II: Resurrected, a modernized remastering of Diablo II and the Lord of Destruction expansion with more attractive and accessible features.
• On September 14, 2021, ATVI appointed Julie Hodges as its Chief People Officer and Sandeep Dube as Chief Commercial Officer, effective from September 21 and 27, 2021.
• On September 08, 2021, TCL Electronics, a consumer electronic company, extended its partnership with ATVI by becoming its official TV partner for Call of Duty: Vanguard.
• On August 19, 2021, ATVI announced that it would launch Call of Duty: Vanguard on November 05, 2021, which offers a World War II like experience across campaigns, online multiplayer, and Zombies co-operative modes. It will also enable seamless integration with the new warzone experience scheduled to debut in H2FY21.

Other Key Findings in Q2FY21

• ATVI paid a cash dividend of USD 0.47 per share (amounting to USD 365 million) on May 06, 2021, to shareholders of record on April 15, 2021.
• ATVI's net bookings in H1FY21 were USD 3.99 billion, higher than USD 3.60 billion reported in the previous comparable period. Its in-game net bookings amounted to USD 2.66 billion vs. USD 2.33 billion in H1FY20.
• In Q2FY21, ATVI's MAU reduced by 4.67% YoY to 408 million vs. 428 million in Q2FY20.
• The Activision segment, which accounted for 47.13% of the total revenue in Q2FY21, reported YoY growth of 24.37%, whereas the Blizzard and King segments improved by 17.05% and 16.21%, respectively.

Net Booking Highlights; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Strong Cash Position: The company exited Q2FY21 with a cash balance (including short-term investments) of USD 9.63 billion, 9.24% more than USD 8.81 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 increased to USD 1.23 billion from USD 916 million in H1FY20.
• Stable Debt: ATVI's total outstanding debt of USD 3.61 billion at Q2FY21 end stood at par with total debt as of December 31, 2020.

Key Metrics: In Q2FY21, ATVI's operating and net margins were 41.8% and 38.2%, higher than 38.8% and 30.0%, respectively, reported in Q2FY20. ROE stood at 5.5%, 120 bps higher than the Q2FY20 return. Debt/Equity was 0.22x as of June 30, 2021, slightly lower than 0.24x as of Q1FY21 end.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 37.18% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 8.26% and 4.93%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Customer Concentration: ATVI's top four customers Sony, Apple, Google, and Microsoft, represented 17%, 15%, 14%, and 11%, respectively, of its total FY20 revenue. As a result, the loss of any of its key customers could hurt its financials.
• Franchise Concentration: In FY20, ATVI derived 76% of its net revenues and significant operating profit from sales associated with Call of Duty, Candy Crush, and World of Warcraft franchises. Overdependence on a limited number of franchises could harm its operations in the long run.
• Dependence on Third Parties: The sale of products for play on third-party video game consoles, such as Sony's PS4 and PS5, Microsoft's Xbox One and Series X, and Nintendo's Switch, accounted for 34% of ATVI's net revenues in FY20. Any decline in consumer demand for such consoles could, in turn, impact the company's financials.
• Technological Risk: ATVIoperates in a rapidly evolving interactive entertainment industry. To stay competitive, it must incorporate new technologies and business models such as cloud-based game streaming and free-to-play and subscription-based access to a portfolio.

Outlook

• Going forward, ATVI stated that it is well placed to continue generating significant cash flows from operations despite the global impact of the COVID-19 pandemic.
• In Q3FY21, it expects to generate net revenue of USD 1.97 billion, with diluted EPS of USD 0.64. It also estimates an operating margin of 35% in the coming quarter.
• For FY21, the company forecasts to clock net revenue of USD 8.52 billion and diluted EPS of USD 3.08, and operating margin is expected to be 37%.
• It also projects to earn USD 1.85 and 8.65 billion in net bookings during Q3FY21 and FY21, respectively.
• The company also stated that it intends to continue to address the concerns highlighted by its employees and other stakeholders in the State of California's complaint filed against it in July 2021 (alleging violations of the California Fair Employment and Housing Act and the California Equal Pay).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, ATVI's share price has corrected 17.17%. The stock is currently close to the lower end of its 52-week range of USD 71.19 to USD 104.53. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of mid-twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering the strong fundamentals, recent product launches, and leading market position. We have taken peers like Electronic Arts, Inc (NASDAQ: EA) and AMC Entertainment Holdings, Inc. (NYSE: AMC). Considering the correction in the stock price, decent top and bottom-line performance, decent outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 77.29, up 0.64% as of October 06, 2021.

ATVI Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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