Computer and mobile games are gaining increasing popularity among young and old alike, particularly following the launch of new games and a shift in the business model of these companies. While in the past video gaming companies relied mainly on one-time sales of new games and thus have had high volatility in their revenues, lately, many online gaming companies have moved to a subscription fee model that enables them to generate strong cash flows and potential for additional sales throughout the year.
On top of that, technological improvements increased computer and cellular processor performance and the widespread use of cloud computing power – these have led to a significant improvement in the gaming experience, image quality, and responsiveness which make online gaming an almost realistic experience.
In 2019, the global gaming market size was estimated at $152B, and this industry consistently shows high single-digit and even double-digit annual growth. The US market is the largest, valued at about $37B last year. The Chinese market is next on the list.
Online gaming companies have presented high growth rates for the past decade, but the coronavirus pandemic has led to a real breakthrough in computer and mobile gaming. With hundreds of millions of people are locked in their homes, the involvement of online users in online gaming has greatly increased. As it looks now, the situation is not expected to change anytime soon, so key gaming companies will continue to enjoy high growth and profitability rates, and may even provide a positive surprise in their reports in the upcoming quarters.
Is Activision Blizzard Still a Buy?
The leading player in the US market and worldwide for online gaming, both in terms of market capitalization and revenues, is Activision Blizzard (NYSE: ATVI). A the time of writing, Activision has a huge market cap of $65.329B. The company was founded in 2008 as a result of the merger between Activision and the gaming division of the European media corporation Vivendi, and later acquired King, the maker of the popular mobile game Candy Crush.
Essentially, Activision Blizzard operates through three main divisions.
Activision Division (approximately 102 million active users) – Recognized thanks to the popular game Call of Duty, one of the pinnacles of interactive games, with sales of over 300 million copies of the game in various versions, including the mobile version.
This division generated revenues of approximately $519m (29% of the company’s total revenues) in the first quarter of 2020, with an operating profit rate of approximately 35%. According to analysts’ consensus, this activity is expected to show an average growth of about 8% in new orders in the next three years.
Blizzard Division (approximately 32 million active users) – The operations of this division include games such as World of Warcraft (WoW), Overwatch, Hearthstone, and Diablo. During the last quarter, this division generated revenues of approximately $452m (approximately 25% of total revenues), with a high operating profit margin of about 44%, a significant improvement in light of WoW’s high growth rates. The consensus forecast for this division is a growth of 19% over the next three years.
King Division (approximately 273 million active users) – This division was acquired in 2015 and coordinates mobile games, including the especially popular Candy Crash game. In the last quarter, the division posted revenue of approximately $498m (28% of revenue), with an operating profit of 31%. This activity is characterized by relatively low growth rates, given the relatively low entry barriers to the rest of the games, and is expected to grow by about 2% in the coming years.
While improving its profitability, Activision has also enjoyed an acceleration in growth in recent years, due to the increasing involvement of interactive users. On top of that, the company constantly launching new games and the increase in revenues from digital subscriptions have ultimately created a rise of 80% in total revenue in the last quarter.
The outbreak of the coronavirus pandemic served as another catalyst for growth in the company’s operations in the first-quarter earnings results. It is likely that the company will report a better than expected report on Tuesday, 4 August.
The ATVI stock has performed strongly over the years, and also recorded a handsome rise recently, surpassing the target price from the majority of analysts. It appears that the stock may continue its uptrend, given the potential for surprise in Activision results. Nevertheless, as online gaming becomes an integral part of social activity, Activision is expected to continue booming by the end of the year and beyond.