For the longest time, buying a game meant going to the nearest store and picking up a CD. The trend has now shifted online, as games can be easily downloaded and played with or against other online players. Activision Blizzard Inc. (ATVI.O) is the maker of hugely successful multiplayer games such as StarCraft, World of Warcraft, Diablo and Call of Duty. Its strategic investments in digital and online technology are paying off as digital downloads and online games have much higher profit margins.
Activision is also enjoying the benefits of a new StarCraft release. The positive StarMine Predicted Surprise of 4.6% indicates that the company may beat analyst expectations this quarter.
Source: Thomson Reuters Eikon/StarMine
Major player
The gaming industry is a fast growing industry with over $15 billion in annual revenues. Activision’s game franchises have each generated billions of dollars in revenue, and continue to excite the gaming world with every new release.
For example, Activision recently released StarCraft II – Legacy of Void, which seems to have been a huge success amongst gamers who were waiting for a long time for a new game in the StarCraft series. Just to put things in context, revenues from these games are higher than even the biggest Hollywood blockbuster movies.
The success of the new release of StarCraft is one reason analysts have raised estimates for Activision. The I/B/E/S consensus estimate is for earnings of 15 cents per share. The SmartEstimate is even higher at 16 cents per share. All the 5-star rated analysts who have updated their estimates since August have estimates above the consensus.
Source: Thomson Reuters Eikon/StarMine
Forging ahead
With a larger chunk of revenues coming from the higher-margin digital content, Activision is looking set for strong earnings in the future, too. That margin improvement has led to four consecutive quarters of improving return on net operating assets. This is a measure of efficiency and after falling for much of 2013 and 2014, this uptick is a good sign. What went against Activision in that period was the delay in new releases. That doesn’t seem to be a problem now with more new releases slated for 2016.
Activision has increased year over year revenues in each of the last four quarters and the holiday quarter will probably be a big test. Based on the estimates, this year’s revenues will handily outpace last year’s. Estimates for fourth quarter revenue are $ 2.2 billion compared to $1.5 billion last year. That kind of revenue growth amid growing margins is a good sign for the company.
In the last earnings conference call, COO Thomas Tippl raised guidance saying “strong results and the excitement for upcoming launches have driven us to raise our full-year outlook yet again.” Those are some positive statements, and part of that raised guidance will probably come from the current quarter. Expect an earnings beat based on the positive Predicted Surprise.
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