One of the few positives to come from the coronavirus is investors now have a better appreciation of businesses that monetize time.
Facebook (FB), Alphabet (GOOGL) and Netflix (NFLX) do this naturally, and they have been rewarded handsomely. However, video game publishers are often overlooked. It’s time for that to change.
And it’s time investors take note of Activision Blizzard (ATVI).
Just over a year ago, the game industry was disrupted. Fortnite, a free-to-play title from Epic Games, was wreaking havoc in the paid game sector. Financial results at Take Two (TTWO) and Electronic Arts (ERTS) were a bust.
Activision announced layoffs. Grand Theft Auto, Madden NFL and even Call of Duty — franchises that once seemed like they couldn’t miss — underperformed.
Everyone was talking about and playing Fortnite. The cross-platform battle royale, set amidst the rubble of a post-apocalyptic world, reached 200 million players at one point. According to a story in the Hollywood Reporter, sales of virtual trinkets pulled in $2.4 billion.
This is a big number. But it pales in comparison to the size of the entire industry.
SuperData, a game industry research firm, found that digital sales climbed 11% in 2018 to $110 billion. A year later, that number soared to $120.1 billion.
There’s plenty of room for competition. After all, Activision, Take Two and Electronic Arts were never in the wrong business — they had a product mix problem. They went into 2018 with too much exposure to premium titles, and too few free-to-play games. By the end of the year F2P titles accounted for $88 billion in revenues, or 80% of total digital sales.
Getting the product mix wrong certainly hurt. At Activision, the largest publisher by sales, a restructuring was announced in January 2019. The company also cut ties to Bungie, the studio behind its Destiny franchise, an underperforming premium title.
Since then Activision managers have gracefully repositioned the company for a new era dominated by F2P titles. They have also begun to leverage all the benefits of the platform. In the future they plan to use data analytics to build new franchises to monetize time spent. The stakes are high.
GlobalData, another digital media research firm, expects the video game industry could reach $300 billion in annual revenues by 2025. Ed Thomas, the principal analyst, anticipates that new technologies, like 5G, the cloud and virtual reality, are converging with aggressive new offerings from the likes of Google, NVIDIA (NVDA), Microsoft (MSFT), Apple (AAPL) and Amazon.com (AMZN).
As these larger technology companies race to become the Netflix (NFLX) of gaming, the current sector leaders are in an enviable position: They have the scale and expertise to provide high quality content.
Striking lucrative distribution deals should be a cinch. In fact, Activision has a vibrant portfolio of secondary opportunities.
The firm is the market leader in eSports. Its Overwatch League is built in the mold of a traditional professional sports franchises. It has city-based teams, rich and famous owners and a regular season and playoff schedule.
It also has highly paid athletes grouped into six-member teams who train for and play Overwatch, the popular online first-person shooter game. The widespread appeal and ramping prospects of video gaming as a spectator sport has attracted a lot of savvy investors.
The San Francisco Shock is owned by NRG Sports. Its investors include the owners of the NBA Sacramento Kings and Shaquille O’Neal. The Kraft Group, of the New England Patriots fame, is running the Boston franchise. And the Los Angles Gladiators are owned by Kroenke Sports, the company behind the L.A. Rams, the Denver Nuggets and Arsenal Football Club.
More recently, Activision managers have increased emphasis on selling ads inside online and mobile games. They’re working with large brands like Nestle to build brand messaging through rewarded video. A player watches an advertisement and gets free gameplay.
It’s a win-win. And it’s a rapidly growing business.
During the fourth quarter of 2019, King, the company’s mobile games business that includes Candy Crush, grew advertising net booking to $150 million, an 80% increase year-over-year.
Brands and investors are coming to realize that gaming has become entertainment for a whole range of consumers. It can be monetized, especially in an era of pandemics where people are spending more time inside.
Activision shares trade at 21.5x forward earnings and 7.2x sales. This is definitely a stock that investors should keep on their radar.
Best wishes,
Jon D. Markman
