4. Activision Blizzard, Inc. (NASDAQ:ATVI)
Number of Hedge Fund Holders: 78
Forward Dividend Yield: 0.69%
Activision Blizzard, Inc. (NASDAQ:ATVI) markets interactive entertainment content that includes video games for computers and mobiles. The company recently posted earnings for the third quarter, reporting earnings per share of $0.72, beating estimates by $0.02. The revenue over the period was $1.88 billion, up 6.2% year-on-year. The firm recently announced a new version of Call of Duty, a popular video game, in time for the holiday season.
However, Activision Blizzard, Inc. (NASDAQ:ATVI) has also announced delays in the release of new versions of two key games, Overwatch and Diablo. Oppenheimer analyst Andrew Uerkwitz, who has an Outperform rating on the shares with a $85 target, believes “talent retention” is a problem for the company.
At the end of the second quarter of 2021, 78 hedge funds in the database of Insider Monkey held stakes worth $3.5 billion in Activision Blizzard, Inc. (NASDAQ:ATVI), up from 76 in the preceding quarter worth $3.7 billion.
In its Q1 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Activision Blizzard, Inc. (NASDAQ:ATVI) was one of them. Here is what the fund said:
“The portfolio established a position in video game publisher Activision Blizzard. As a watchlist company we have followed Activision for several years. As a reminder the role of the watchlist is to allow us to focus on a select group of companies where we seek to observe important signals around either value latency, industry trends or management behaviour that portend attractive investment propositions.
Technology can often play a disruptive role in content, however video games are a clear beneficiary of technology, both in terms of more immersive and realistic gaming experiences as well as the monetisation opportunities this creates.
In order to benefit from these trends, video game publishers must be owners of unique IP. Activision Blizzard fits this bill perfectly boasting a portfolio which includes franchises such as Call of Duty, World of Warcraft and Diablo just to name a few.
The business is run by CEO Bobby Kotick, who together with Chairman Brian Kelly purchased the foundation assets for the company for US$400k in the early 1990s. Today Activision has a market capitalisation of over US$70bn. Over the last few years Bobby and his management team have refocused resources onto their best IP, with the goal of capitalising on the aforementioned industry tailwinds.
We saw the benefits of this in 2020 with the release of Call of Duty Mobile and Free-to-Play versions (with in game micro transactions) complimenting the traditional core console game. Engagement increased materially and due to the very favourable economics of content publishing, Operating Income more than doubled for the Call of Duty Franchise. Even adjusting for the impact of lockdowns, this is a phenomenal outcome.
Activision has 3-4 key pieces of IP with which they plan to repeat this playbook over the next couple of years. If they can replicate the success of Call of Duty, even in part, we see material upside to the free cash flow power of the business. Further, revenue sources are broadening which will move the profile away from a traditional lumpy annual release cycle of the old video game model towards one of a more recurring nature. This will transition Activision from a publishing to a services business, likely attracting a higher multiple than the current mid-low 20x FCF which is broadly in line with the market. To summarise, we see significant value latency and a pathway to double digit returns over the medium term.”
