Activision Still Has Huge Upside Potential

Gaming stocks have been performing very well over the last few years. The rise of digital sales has allowed gaming companies to improve their margins, which in turn has had a huge positive impact on the earnings.

As a result, companies like Activision Blizzard, Inc. (ATVI) and Electronic Arts Inc. (EA) have performed very well over the last few years.

Look for Activision to take the lead

Activision Blizzard has successfully managed to hold a leading position in the impulsive video-game industry mainly due to skillful management and a steadily perceptive navigation of industry trends.
Throughout the prior two decades, no other gaming company has a better record of presenting and capitalizing on the value of new franchises.

A couple of years ago, Activision Blizzard’s business was controlled by just three classic video game franchises: Call of Duty, World of Warcraft, and Skylanders. Those franchises accounted for approximately 80% of overall revenue in 2013 with an even greater slice of profits.

After that, Activision has impressively expanded its portfolio to comprise new key titles like Hearthstone, Overwatch, and Destiny. Moreover, when Activision realized that it had tumbled behind in the continuously growing and increasingly significant mobile segment, the company swiftly solved the problem by acquiring King Digital for a whopping $5.9 billion.

To complete this acquisition, the company was forced to add more debt to its books, but the acquisition has offered the company a speedy growth driver in the mobile segment.

Activision is using its digital focus to increase sales via subscriptions as well as in-game purchases like add-on gaming packs, DLCs, new characters, etc.

In the most recent quarter, the company’s digital sales surged to $1.4 billion, an increase of 129% over the year before.
Activision Still Has Huge Upside Potential
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Moreover, in-game purchases accounted for a record $1 billion, proving to be a significant sales driver.

Activision’s belligerent focus on digital sales instead of selling games through vendors is a substantial driver of higher profitability. Without physical products, these sales are more profitable as retailers’ cut has been eliminated. Throughout the past quarter, operating margin reached 37%, a surge of 14% compared to the same quarter of 2015.

Since digital sales still do not account for all game sales, there is enough room for Activision to improve its profitability.

Watch the run continue

Due to the reasons mentioned above, I think Activision’s run-up will continue. As long as Activision keeps on improving its profitability by growing digital sales and efficiently monetizing its existing games, the stock will continue moving higher.
Published on Oct 14, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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