Activision Blizzard (ATVI): Last Chance Of Redemption

Investment Thesis

Activision Blizzard (NASDAQ:ATVI) will be releasing new games in the second half of 2022, which can mean that there will be a significant increase in monthly active users [MAUs] which also can potentially increase its monthly returning user volume in their game. Although MAUs and player volume depend on the quality of the released games, I still believe they could perform much better under Microsoft’s (MSFT) management solely because they can access Microsoft’s gaming community and its different partners through the Xbox Game Pass once the acquisition is completed. The stock will have a rocky short-term price movement, but I believe it still has potential for long-term performance, leading me to rate it as a Buy.

The Microsoft Acquisition Effect To Gamers

The Microsoft acquisition will benefit Activision Blizzard in many ways. However, I wanted to tackle more into the subscription (Xbox Game Pass) side. On June 13, 2022, Riot announced that the Riot Games Community and Xbox Communities are Coming Together on Game Pass. The announcement shocked the gaming community because the low cost of a monthly Xbox Game Pass gives many benefits across the different games that Microsoft and Riot offer. If ATVI’s player base finds value from the Xbox Game Pass, this can be a way for Microsoft to monetize ATVI while still getting revenue from in-game bookings and game purchases. We’ll get into the perks and benefits later. But first:

How can Microsoft help the ATVI gaming community? Aside from the change in management, one way is the Xbox Game Pass and the perks that can come with the monthly subscription.

This can be seen with Riot’s partnership with Microsoft for the Xbox Game Pass. Why is this relevant? Once the Microsoft acquisition is completed, there’s a high possibility that they’d pull the same thing off with the Riot and Xbox Game Pass deal.

“Today, Riot Games and Xbox are announcing that all of Riot’s biggest titles are coming to Game Pass. This brings together two of the biggest gaming communities in the world around a shared love of player-focused competitive games. Game Pass is the latest in a long line of innovations from Xbox, and we can’t wait to add our games to its catalog. We’re excited to invite Xbox players to join our 180-million-strong community of aspiring pros, hardstuck silvers, content creators, K/DA fans, and more.”

– Riot Games Coming To Game Pass

The Xbox Game Pass benefits for Riot Games bring so much value. How can I say this? Before I answer that question, here are the benefits that come with the Riot & Xbox partnership:

• League of Legends [PC]: All Champions Unlocked

• League of Legends: Wild Rift (Mobile): All Champions Unlocked

• Legends of Runeterra (PC & Mobile): Foundations Set Unlocked

• Teamfight Tactics (PC & Mobile): Select Little Legends Unlocked

• VALORANT [PC]: All Agents Unlocked

Most, if not all, games that Riot Games produce are free, and players can get all of the champions (for League of Legends) and agents (for Valorant) for free as long as you put in the hours of grinding game experience. Players think the Xbox Game Pass gives so much value up to the point that they feel that Riot Games is turning into a pay-to-win game publisher because unlocking all champions, agents, and foundations sets take a long time to grind.

“If you can bring that average up, and also earn additional bonuses such as getting the chest for S-rated performances every week, the quickest estimate is at just over a year – although that requires a massive average of 10 games per day. There’s also a degree of diminishing returns for those extra games – although the timeframe might be shorter due to the number played per day, you’re also going to end up playing nearly double the total number of games.”

– Source

To give some context, a Reddit user called Lust_For_Love made some calculations, and they calculated that it could take as long as 3424 days – nearly nine and a half years to unlock all champions in League of Legends if you’re averaging one game a day without spending any money in the game. With the Xbox Game Pass, you unlock all the champions and get to use and play all of them. With a small price of $1/month, you can get the Xbox Game Pass and use all the champions that would’ve taken you almost nine years to attain if you played one game a day. Obviously, the more you pay, the better the benefits. This got some mixed reactions from gamers around the world, and my guess is that the people that got the champions the hard way (playing X hours a day) are a bit infuriated since they could’ve paid the same subscription to unlock all of the champions. However, this also got positive feedback since busy people looking to try different champions or gamers who don’t bother pouring hours into the game to unlock certain champions can enjoy the game even further with a simple subscription.

For Valorant’s case, there are about 18 agents in the game. To get an agent, the player must activate the agent contract (you must activate this option to choose which agent to unlock) and accumulate 375,000 xp per agent. The maximum amount of xp you can receive in a game is 5,100 if the final score is 13-12 (Valorant is an FPS game where there are 2 minutes per round, race to 13, and there are attackers and defenders, attackers plant the bomb in a site: A site or B site, C site in select maps, and the defenders defend and stop the players, for a 13-12 score, there’d need to be at least 40 minutes of gameplay). So, in theory, that would be 37 hours per agent, so if we multiply 11 (5 are free, and you get another two free agent unlock cards after levels 5 & 10) and 37. You’d need about 407 hours of playtime if you were averaging 30-40 minutes per game if you wanted to unlock all agents in Valorant, excluding daily bonus xp. Xbox Game Pass saves all your time since, with the subscription, you get access to all agents.

The Xbox Game Pass gives so much value to the Riot Games community since you save time, effort, and stress (from losing games) to unlock specific champions/agents; they can potentially do the same thing for the Activision Blizzard community as well. The mixed reaction is to be expected since this change is new to the community. The more you think about it, if you were in the hardcore gamers’ shoes, it wouldn’t seem fair for somebody to pay a small price to unlock all the champions/agents that took you hundreds of hours to acquire at first. I think the gaming community will accept this change and may see this happening in ATVI’s case. I don’t want to sound like an advertiser of Xbox Game Pass, but I believe this change will be significant for Microsoft, ATVI, and the player base.

Because Xbox Game Pass is a subscription, players would typically feel the need to play all the games available/covered in the subscription to get the most out of their monthly subscription. This means that players who haven’t tried ATVI’s games before may have a chance to enjoy the game and hopefully increase ATVI’s MAU. We have yet to see the perks and benefits of ATVI’s case. That’s why I’m eager to wait on what Microsoft’s perks and benefits will be for ATVI once they complete the deal.

Increasing MAUs After Releasing Games

ATVI announced in their second quarter 2022 financial results that they would release games: Call of Duty: Modern Warfare II (October 28), Call of Duty: Warzone 2.0 (Later in 2022), Diablo IV (2023), Wrath of the Lich King Classic (September 26), and Overwatch 2 (October 4). They won’t be released at the same time, but the timing of these game releases is essential.

I think that this year will be a chance for ATVI to fix things with its fanbase. I’m not only talking about Activision and what they’re doing with the Call of Duty franchise. They’re doing great in that department. They’re set to release two games in the following months, with Call of Duty: Modern Warfare II being a direct sequel to 2019’s Modern Warfare reboot and Call of Duty Warzone 2.0, which is “built from the ground up” and will feature “groundbreaking innovations.” As seen from the picture above, Activision has been in a challenging situation in terms of MAUs. These game releases can change if they deliver and exceed expectations with their releases.

On the other hand, Diablo IV was announced at BlizzCon 2019, Blizzard’s entry in a legendary-RPG series taking players to an open-world setting that separates heaven and hell. The story campaign will be filled with crafting, trading, world events, side quests, PVP areas, and camps. I think this can bring the Diablo series back to life. They got booed on BlizzCon 2018 after completely switching the Diablo series to mobile, disregarding its growing PC gamer fanbase. With Diablo IV, they have a considerable chance of winning the hearts of its fanbase again. Maybe a “huge chance” is too optimistic, but hey, at least they support PC and console now on Diablo IV. It’ll also support cross-play, which can benefit the console players in the Xbox Game Pass community once the Microsoft deal takes place and provide a better social gaming experience overall. They are also set to release Wrath of The Lich King Classic, the expansion for World of Warcraft Classic, on September 26, and World of Warcraft: Dragonflight, as the name implies, it’s all about dragons, later this year.

Last but not least, they are set to release Overwatch 2 on October 4, 2022. Alongside Diablo IV, Overwatch 2 was announced at BlizzCon 2019, which features PvP, PvE modes, co-op story missions, replayable hero missions, and an all-new 5v5 competitive mode called Push. I want to start by saying that I don’t think that Overwatch 2 will be a sudden game trend like Valorant or will have a loyal gamer base like League of Legends, Dota 2, or CS:GO right away, but I think it’s excellent that ATVI is finally listening to its community and the games may sound too good to be true, they meet player’s expectations (at first and except the Diablo Immortal announcement, people hated that release with a passion when it first got mentioned), maintaining the game quality through updates is where they struggle. Overwatch 2 sounds a bit more interesting to me. They are straying away from the 6v6 format in competitive play, which was odd to me back then since competitive games usually play in odd-numbered teams like Rocket League, Valorant, Dota 2, and CS:GO. I think that it’s great that they’re finally adapting to a 5v5 competitive mode. The 6v6 format just wasn’t it for them.

ATVI has been falling off in terms of MAUs for the past few quarters. The MAUs is an essential metric to determine how many people are playing and are potentially spending on the game. The more players, the more revenue, but overall, I think MAUs will increase in the following months, considering that they are releasing many games in late 2022. The timing is excellent, too. They are releasing games close to the holiday season. This means children and adults can play the games they release since the holiday season means no school and no work, giving them more time to play the freshly released games, further boosting ATVI’s MAUs.

Valuation

ATVI is currently trading at a 20x EV/EBITDA multiple, which means that it’s trading above its peers like NetEase (NTES), Nintendo (OTCPK:NTDOY), and Electronic Arts (EA). However, I think it is justified since there is growth to be found in the company’s game releases and the upcoming Microsoft-Activision deal that will potentially shoot the stock price up. Combining my fundamental analysis, I think that ATVI is a buy because the stock may potentially be trading at a higher multiple than it is today.

Investor Takeaway

I think that the Microsoft-Activision deal will create a win-win situation ONLY IF the games that ATVI makes keep the players playing in their games. The Xbox Game Pass will also benefit the ATVI players and the MSFT gaming community since there will most likely be perks and benefits for the Xbox Game Pass subscribers that can be found in ATVI’s games. The new game releases in late 2022 and 2023 can bring more MAUs in the short term and possibly attract new players or even maintain the MAUs if the games they release meet expectations. I rate the stock as a Buy. Under MSFT’s management and access to their gaming communities, ATVI has a chance to grow back its player base and possibly make a comeback story for themselves.

Thank you for reading, I appreciate your time.