Activision Blizzard, Inc. (ATVI)
Minjoo Kim, Keng Hoe Wong, Qing Yi Yu, Salta Muslim-Ali, Vincent Yu & Vrushank
Vora
NME W11: Greg Yun
Introduction
Stock Summary
Company Name:Activision Blizzard
Stock Symbol:ATVI
Market Capitalization: $ 13,404 MM
Share Price: $ 11.17
LTM Revenue: $ 4,447 MM
LTM Net Income: $ 418 MM
Forward P/E:15.5x
• Largest pure-video game
developer/publisher
• Merger of Vivendi Games
and Activision in 2007
• Majority Owned by Vivendi SA
• N.A., Europe & Asia
Product Line
Product Line (Continued)
Thesis
Industry:
• Growing Chinese Market
• Move towards digital revenue channels
• Move towards non-casual games from casual games
Company:
• Consistent trend of quality “hit releases”
• Ability to innovatively monetize revenue opportunities
• Commitment to increasing shareholder value
Quant: Analysts are undervaluing company due to
• 4Q failure to meet GAAP revenue expectations
• Cancellation of Guitar Hero
Industry Outlook
Industry Trend (Global)
• 52.9 billion (2009) / 86.8
billion (2014)
• Projected CAGR of 10.6
Percent
• Growth in industry
Fig. 1 Media Spending Growth
Outlook by Segment from PwC
• MMOG gaming
• Online gaming
• Mobile gaming
Industry Trend (Regional)
• Current Generation Console - 23% Growth
• First-Person Action Genre - 29% growth N.A./Europe sales
• Wii/Handheld Devices – Decrease in Sales
• Top 10 titles - 37% of U.S. sales
• Digital Distribution – 14% Growth in N.A./Europe sales
Fig. 4 2010 Game Growth
by Segment by Newzoo
Fig. 2 2010 Revenue Breakdown
of Industry from Newsweek
Industry Trend (China)
• 26% increase in Chinese
gamers accounted for 61%
increase in 2009 global online
game revenue
•20.9% CAGR of online game
market through 2014
• MMOGs account for 77% of
online revenue growth
• Piracy is barrier to entry
•
Company Thesis
Revenue Sources/Channels
Fig. 5 ATVI Revenue Growth in 2009 Year-End Data
• Subscription/Licen
sing: 31%
• Product Sales: 69%
• Digital Sales: 30%
Overall / 20%
Growth
• International
Operations: 46%
• Asia 6% Overall /
32% Growth
World of Warcraft
• 12 million subscribers (monthly US / hourly
China) / Value Added Services
• $3.5 million in one day on a virtual horse
• WoW: Cataclysm was fastest-selling PC game
ever
Fig. 6 MMOG Breakdown May 2008
Fig. 7 MMOG Subscriptions 2011
World of Warcraft (China)
• 5% of China’s $3 billion
MMO market
• 1.5 million paying customers in
first month
• In 2008, one of three MMOs in
China with over 1 million peak
computer users (PCU)
• 5.5 million Asian Users /2.6
million PCU
• 55% Royalty - NetEase
Market Strategy
• Consolidate energies on high-margin hits
• WoW & CoD – 62% of Revenue
• CoD Downloadable Content – $21 million in
24 hours (Record for Xbox Live)
• Expand in China
• WoW: Cataclysm
• CoD: China F2P
• Digital Growth
Fig. 8 US MMOG Breakdown May 2010
Competitive Advantages
• Quality Assurance with Big Recognizable Hits
• #1 Publisher in N.A. / Europe
• CoD: Black Ops was #1 Title Worldwide: $1 billion
revenue
• 3/5 Top PC Titles in N.A./Europe
• In-line with Industry Trends
• 20% Digital Growth / Only 30% of total revenues
• Market Leaders in non-casual gaming titles
• Console Game Leader
• Crowd Effect
• Online Community in Battle.net
Competitive Advantages (Continued)
Competitive Advantages (Continued)
Future Releases
2012
2012
2012
2011
2012
Recent News
• Canceled Guitar Hero/Tony Hawk Series
• Laid off 500 Employees
• Shares dropped 8% on February 10th
• Non-GAAP EPS of 53 cents beat 4Q expectations
•
•
•
•
Year End GAAP EPS increased 33 cents
Year End Non-GAAP EPS Increased by 15%
Quarter End GAAP EPS dropped 20 cents
Year End Non-GAAP Revenues 20% Growth
Shareholder Strategy
• 2009: $1.2 billion in shares repurchased
• 2010: $1.5 billion in shares to be purchased
• Three-Year Total – $3.7 billion
• Cash Dividends increased by 10%
Portfolio/Investment Risk Factors
•
•
•
•
Deterioration of Economic Condition
Controlled Company
Lack of Franchise/Hit Diversification
GAAP defers increasingly online-generated revenue
• Current tech holdings
• PWRD: Perfect World
Company Thesis
Consistent trend of quality “hit releases”; ability to
innovatively monetize revenue opportunities,
especially in alignment with the current industry
trends; and commitment to increasing shareholder
value; demonstrate that ActivisionBlizzard to be a
consistently successful leading innovator in the
gaming market.
Quant Thesis
Historical Growth Summary
($ in millions of US dollars)
Fiscal Year
Ending: 12/31
2006
Revenues
73.4
Growth
EBITDA
173.7
Growth
Net Income
Growth
2008
2009
$1,388.6 $1,349.0 $3,026.0 $4,279.0 $4,447.0
Growth
Operating Income
2007
CAGR
20062010 2010
89.3
-2.9%
124.3%
41.4%
3.9%
178.0
(40.0)
406.0
798.0
142.5%
-122.5%
241.0
345.0
753.0
996.0
38.7%
43.2%
118.3%
32.3%
228.0
81.0
538.0
747.0
155.2%
-64.5%
564.2%
38.8%
33.8%
81.6%
96.6%
54.7%
70.0%
Historical Margins
($ in millions of US dollars)
Fiscal Year Ending:
12/31
2006
2007
2008
2009
2010
$1,388.6
27.1%
5.3%
12.5%
6.4%
$1,349.0
67.7%
13.2%
17.9%
16.9%
$3,026.0
39.2%
-1.3%
11.4%
2.7%
$4,279.0
46.1%
9.5%
17.6%
12.6%
$4,447.0
52.2%
17.9%
22.4%
16.8%
Assets
Asset Turnover
Return on Assets
1,891.5
0.7x
4.7%
2,613.1
0.5x
8.7%
14,465.0
0.2x
0.6%
13,742.0
0.3x
3.9%
13,406.0
0.3x
5.6%
Shareholders' Equity
Financial Leverage
Return on Equity
1,408.9
1.3x
6.3%
1,866.4
1.4x
12.2%
11,527.0
1.3x
0.7%
10,756.0
1.3x
5.0%
10,203.0
1.3x
7.3%
Revenues
Gross Margin
Operating Margin
EBITDA Margin
Net Income Margin
Historical Financial Health
($ in millions of US dollars)
Fiscal Year Ending:
12/31
2006
2007
2008
2009
2010
$1,408.9
$1,866.4
$11,527.0
$10,756.0
$10,203.0
Operating Income
Interest Expense
73.4
-
178.0
3.0
(40.0)
3.0
406.0
4.0
798.0
-
Current Assets
Inventory
Current Liabilities
1,484.4
85.7
441.5
2,177.4
153.4
725.7
5,259.0
262.0
2,084.0
5,329.0
241.0
2,507.0
5,385.0
112.0
2,907.0
0.00
3.36
3.17
No Interest
Exp
0.00
3.00
2.79
0.00
2.52
2.40
0.00
2.13
2.03
59.33
N/A
Debt
Shareholders' Equity
Debt/Equity
Current Ratio
Quick Ratio
Interest Coverage
0.00
1.85
1.81
No Interest
101.50
Exp
Base case Assumptions
Revenue Growth
Operating Margin
Effective Tax Rate
Depreciation & Amortization
Capital Expenditures
NWC as % of Revenue
Historical Financials
2006
2007
N/A
-2.85%
5.29%
13.19%
24.37%
-29.21%
7.22%
4.67%
1.68%
5.04%
17.12%
19.50%
2008
124.31%
-1.32%
200.00%
12.72%
1.52%
5.72%
2009
41.41%
9.49%
-29.80%
8.11%
1.61%
-9.89%
2010
3.93%
17.94%
9.27%
4.45%
2.18%
-23.16%
Growth and WACC Assumptions
Base
Revenue Growth
Operating Margin
Effective Tax Rate
Depreciation & Amortization
Capital Expenditures
NWC as % of Revenue
Tax Rate
Alternative Beta
Market Rate
2011
2012
2013
2014
2015
$3,993.6
18.4%
15.8%
3.0%
2.2%
2.0%
$4,051.6
18.4%
15.8%
3.0%
2.2%
-4.0%
$4,375.7
18.4%
15.8%
3.0%
2.2%
-1.0%
$4,813.3
18.4%
15.8%
3.0%
2.2%
0.0%
$5,390.9
18.4%
15.8%
2.2%
2.2%
1.0%
15.8%
0.65Terminal Growth Rate Assumption
9.00%Terminal Shares Outstanding
2.50%
1,200.0
Low & High Case Assumptions
Low
Revenue Growth
Operating Margin
-15.0%
18.4%
1.0%
18.4%
5.0%
18.4%
7.0%
18.4%
Terminal Growth Rate Assumption
Terminal Shares Outstanding
High
Revenue Growth
Operating Margin
-10.0%
18.4%
4.5%
18.4%
9.0%
18.4%
2.00%
1,200.00
11.0%
18.4%
Terminal Growth Rate Assumption
Terminal Shares Outstanding
9.0%
18.4%
13.5%
18.4%
3.00%
1,200.0
DCF Output: Base Case
Scenario:
Terminal Growth Rate:
Terminal Shares Outstanding:
Weighted Average Cost of Capital:
Base
2.50%
1,200.0
7.15%
Present Value of Forecasted Cash Flows:
Present Value of Perpetual Cash Flows:
Present Value of Total Cash Flows:
Value of Debt:
Value of Cash:
Value of Equity:
2,958
12,609
15,567
0
3,508
19,075
Value of Equity Per Share:
Range (in %):
$15.90
10%
Value Per Share Range:
$14.31
Current Price of Stock:
-
$17.49
$11.12
P/V Ratio:
0.64x
-
0.78x
Potential Upside:
28.7%
-
57.2%
DCF Output: Low and High Case
Scenario:
Downside
2.00%
1,200.0
Upside
3.00%
1,200.0
Weighted Average Cost of Capital:
7.15%
7.15%
Present Value of Forecasted Cash Flows:
2,500
3,097
Present Value of Perpetual Cash Flows:
10,219
15,206
Present Value of Total Cash Flows:
Value of Debt:
Value of Cash:
Value of Equity:
12,719
0
0
12,719
18,303
0
3,508
21,811
Value of Equity Per Share:
Range (in %):
$10.60
10%
$18.18
10%
Terminal Growth Rate:
Terminal Shares Outstanding:
Value Per Share Range:
$9.54
Current Price of Stock:
-
$11.66
$16.36
$11.12
-
$19.99
$11.12
P/V Ratio:
0.95x
-
1.17x
0.56x
-
0.68x
Potential Upside:
-14.2%
-
4.8%
47.1%
-
79.8%
DCF Sensitivity
DCF Valuation Sensitivity Analysis
WACC
Terminal
Growth Rate
7.15%
WACC Sensitivity
Term. Growth
Sensitivity
2.50%
0.50%
0.25%
WACC
$15.90
6.15%
6.65%
7.15%
7.65%
8.15%
2.00%
$17.65
$16.08
$14.82
$13.78
$12.91
Terminal
2.25%
$18.46
$16.71
$15.32
$14.19
$13.25
Growth
2.50%
$19.39
$17.42
$15.88
$14.64
$13.62
Rate
2.75%
$20.45
$18.22
$16.51
$15.14
$14.02
3.00%
$21.68
$19.13
$17.20
$15.69
$14.47
Football Field
Implied Equity Valuation Per Share
Trading Comps Price Range
Analyst Opinions
DCF Downside
DCF Upside
DCF
Current Stock Price
52 Week Trading Range
$0
$10
$20
$30
$40
Comparables
Trading Comparables Valuation
($ in millions
except for per
share data)
EV/Revenue
(2011E)
EV/Revenue
(2012E)
EV/EBITDA
(2011E)
EV/EBITDA
(2012E)
P/E (2011E)
P/E (2012E)
P/B
ATVI
Multiplier
Low Mult.
High Mult. Price (low)
Price high)
Include?
$3,900.00
0.5x
-
1.2x
$4.43
-
$6.82
Yes
$4,540.00
0.4x
-
1.1x
$4.56
-
$7.04
Yes
$1,434.00
9.2x
-
14.1x
$13.94
-
$19.83
Yes
$1,727.00
$0.72
$0.88
$0.00
7.3x
19.1x
15.6x
1.6x
-
13.3x
27.5x
35.0x
2.6x
$13.42
$13.76
$13.74
$0.00
-
$22.03
$19.77
$30.83
$0.00
Yes
Yes
Yes
Yes
Value Range:
$9.12
-
$15.19
Suggested Premium:
-18.0%
-
36.6%
Comparables
Valuation Comps
($ in millions except for per
share data)
Price Per Share
Market Capitalization
Shares Outstanding
ATVI
$10.95
13,140.0
1,200.0
ERTS
18.40
6,151.1
334.3
TTWO
16.24
1,521.7
93.7
THQI
5.61
381.1
68.0
Estimated EPS (2011E)
Estimated EPS (2012E)
Estimated Revenue (2011E)
Estimated Revenue (2012E)
Estimated EBITDA (2011E)
Estimated EBITDA (2012E)
$0.72
$0.88
3,900.0
4,540.0
1,434.0
1,727.0
$0.67
$0.86
3,760.0
3,940.0
465.0
588.0
$0.85
$1.04
1,110.0
1,290.0
94.0
165.0
$(0.28)
$0.16
803.0
861.0
-4.0
28.0
Summary
• Company strength is aligned with industry
trends
• Beginning to capitalize on tremendous market
potential in China
• Leading innovator in the market; consistent
history of hits
• Analysts don’t believe stock can overcome
Guitar Hero cancellation
Questions?