With the global economy taking hit after hit, and no signs of Covid-19 pandemic ending any time soon, there are very few winners out there. One such winner could be Activision Blizzard (NASDAQ: ATVI). Since its catastrophic shares price drop in Q4 2018, the company has been on a steady recovery path ever since.
The company benefited from the global pandemic, as hundreds of millions of people around the world had no choice but to spend more time at home. There were more movies watched, more online deliveries made, and most importantly, more games played. With its blockbusters Call of Duty and World of Warcraft seeing extremely healthy increases in operating margins in Q1 2020, we can expect a sustained high margin profitability in Q2. Surplus cash reserves will allow the company to make medium-long term investments in R&D, market expansion and new product development.
Positive market sentiment is not without merit: highly expected releases of PlayStation 5 and Xbox Series X will undoubtedly provide so necessary boost to many game developers, including Activision Blizzard. The company is also riding high on the wave of Call of Duty fans currently awaiting the latest iteration of its blockbuster first-person shooter franchise. What stood out in Q1 is monthly active users (MAU) being at 407 million. Such a large customer base gives Santa Monica based gaming giant enormous opportunities to deliver in-game experiences and offerings resulting in even higher revenues per active user.
Recent success does not come without risks. So far, the global pandemic helped keeping its customers glued to the screens. However, with a prolonged economic decline, users eventually may start cutting down on non-essential expenses, including in-app purchases in the company’s games. We also cannot ignore the ever-changing landscape in the gaming world. King, one of the group’s money printers behind its hit Candy Crush, has been having lower year on year operating margins , because of decreased revenues and increase costs in customer acquisition. Q2 results will show whether it was just a temporary dip or a continuous decline of the game’s popularity. Part of the ever-changing landscape are the newcomers, such as Fortnite by Epic games, which do challenge longer running titles and ensure that their developers will not fall asleep behind the wheel.
Overall, the company is on a good path this year. It does not necessary mean that it will be a comfortable ride, as it still must recover from lower revenues in the previous quarters. It is also likely that the stock price rally will be upheld by industrial investors seeking shelter from the losses in sectors currently experiencing substantial drops in revenues with medium term prospects being gloomier than ever. It may reevaluate certain acceptance criteria and risks models that previously would not have mandated investments in the gaming industry and Activision Blizzard in particular.
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