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Activision Blizzard: Pushing to Mobile amid Legal Trouble
Stock Analysis & Ideas

Activision Blizzard: Pushing to Mobile amid Legal Trouble

Activision Blizzard (ATVI) has three business segments, including Activision Publishing, Blizzard Entertainment, and King Digital Entertainment.

The company primarily generates revenues through games, in-game sales, and licensing software to third parties. It offers content through both premium and free-to-play offerings.

The company’s key product franchises include Call of Duty, Warcraft, and Candy Crush. (See Activision Blizzard stock charts on TipRanks)

The stock has been on a downward slide recently with a fall of 16.1% over the past three months, even after a strong Q2 fiscal performance. This has been due to a flurry of legal proceedings against the company, which led to the departure of its president, J. Allen Brack.

In July, the California Department of Fair Employment and Housing filed a complaint against the company, alleging violations of the California Fair Employment and Housing Act, and the California Equal Pay Act.

ATVI stated in its press release that if the company continues to face “prolonged periods of adverse publicity, significantly reduced productivity or other negative consequences relating to this matter, our business likely would be adversely impacted.”

Wells Fargo analyst Brian Fitzgerald believes that “Blizzard’s new leadership are less familiar with [World of Warcraft] players and developers than departed President J. Allen Brack, who grew with the franchise for 15 years, and any prolonged period of adverse publicity could affect developer recruiting.”

The analyst reiterated a Buy rating, and a price target of $120 (57.5% upside) on the stock, following the Q2 results.

To add to Activision’s woes, The Wall Street Journal reported that the Securities and Exchange Commission (SEC) has launched an investigation into the company regarding its handling of discrimination at the workplace, and how it has handled allegations of sexual misconduct from employees.

The report also stated that the SEC has subpoenaed several senior executives at Activision, including CEO Bobby Kotick.

In Q2, the company’s stellar second-quarter results benefitted from strong execution by creative and commercial teams.

The video game company generated $1.92 billion in net bookings in the quarter, beating the consensus estimate of $1.89 billion. However, the result came in below the $2.08 billion generated in the same quarter last year. In-game net bookings also declined to $1.32 billion, compared to $1.37 billion reported in the second quarter of 2020.

The company defines net bookings as an operating metric as “the net amount of products and services sold digitally or sold-in physically in the period, and includes license fees, merchandise, and publisher incentives, among others, and is equal to net revenues excluding the impact from deferrals.”

Earnings per share landed at $1.20, compared to $0.81 for the second quarter of 2020, and were above consensus estimates of $0.74. Activision ended the quarter with 408 million monthly active users.

In Q3, Activision expects earnings of $0.75 a share, while in FY21, earnings are expected to come in at $3.54 a share. Net bookings for Q3 and 2021 are expected to be $1.85 billion and $8.65 billion, respectively.

Fitzgerald also noted other key positives for the stock in Q2. This included a strong performance of its franchises Warzone and Call of Duty Mobile that is on track to deliver over $1 billion in consumer spending for the year.

The analyst added, “Mobile now accounts for 40% of net bookings, demonstrating ATVI’s success in expanding its IP into the world’s most populous platform.”

Turning to the rest of the Street, analysts are bullish on Activision Blizzard, with a Strong Buy consensus rating, based on 14 Buys and two Holds.

The average Activision Blizzard price target of $113.87 implies 49.5% upside potential from current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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