The objective of this post is not to convince you to buy or sell ATVI- it is to provide potential/current investors with useful information about the company that may be overlooked before their 4Q earnings are posted tomorrow. It is a long but informative read that you will find useful. Being an active gamer for over a decade as well as an MBA/CPA, I am confident in the information I provide about the company.
There are four main aspects of ATVI that could effect stock performance tomorrow: Call of Duty BO2, WoW, Skylanders Franchise, and upcoming releases for 2013/2014 as well as the overall outlook of the gaming industry.
Any "Googled" financially-related news story regarding BO2 will tell you that it broke record sales (as predicted) sold $500 million first week, CoD is top entertainment franchise of all time, etc etc. But what has the game sold since its initial release week? There are a few things about that I would like to share.
First of all, I play BO2 on both PS3 and/or Xbox almost daily. One of the key statistics that no one talks about that is a proven trend I've followed since Black Ops 1 is how many players are playing online at any given time. Since BO1, Call of Duty games have shown how many players are online at the time you are online. This does not include those who are currently playing the single player campaign mode. I like to track the number of players online at a given time on a weekly basis (usually Saturday or Sunday) and see how the average base of players increases over time. From the initial release week to the end of January, BO2 showed a much larger increase in the average base of players than MW3 or BO1 did in the same period. Based on the data I had, Christmas sales were much more robust than last year, and I think that many more casual gamers bought the game this year because it ended up being rated higher and was more well received by the first person shooter (FPS) community than MW3 or BO1 was. Another way the game is generating a little revenue is by giving people the option to pre-order the CoD map packs for $50. While I do not believe this is as significant as the average player base statistic, I do think it is something that is overlooked in analyst sales estimates.
Some people have been concerned about the competition Halo 4 creates and how it could effect CoD sales. First and most importantly, Halo 4 is exclusive to Xbox, so immediately half of the CoD market is completely unaffected. Secondly, reports on average daily volume of players has shown that after the first few weeks CoD was released, it surpassed Halo 4 on Xbox from an average daily user standpoint, and given the data regarding average number of players online, I do not think the actual sales of the game were effected much by Halo 4. Perhaps the only thing effected is how long certain players play CoD in relation to Halo 4. In addition to these statistics, many people forget that Battlefield 3 came out around the same time CoD did last year and while the Battlefield title games are not as renowned as Halo, it is a game available for both consoles and the overall sales of CoD seemed unaffected by it (hence why people forgot about CoD's competition last year during release).
The one aspect of the company that could potentially have some negative implications for stock performance are reports on the number of World of Warcraft subscribers. While the number of subscribers jumped during the last expansion release (Mists of Pandaria) the same trend was true of the two prior WoW expansions. Typically around the time of an expansion, the subscriber base for WoW jumps up temporarily, and then is followed by a more drastic decline. I have not followed World of Warcraft as closely as I have ATVI's console games, but nevertheless this aspect of the stock is the one aspect that makes me nervous.
I do not follow the Skylanders Franchise enough to provide information that could not already be inferred by reading recent articles about the franchise so I will not comment on this aspect of the company.
I also do not expect Diablo III sales to effect Q4 very much at all- I think the game was hyped during Q3 and Blizzard did a great job advertising the game and initially it seemed awesome, but a large portion of the gaming market became bored of the game relatively quickly. One aspect of the game that will generate a little revenue for the company is the real money auction house. Think of it as a "gamer's version of ebay" where you can buy and sell in-game items for real money.. and of course Blizzard takes 15% of what you sell it for. Nevertheless, I do not think Diablo III will have much effect on stock/earnings performance tomorrow.
The aspect of the earnings report I am anticipating the most is upcoming releases for Activision-Blizzard. More specifically, I am excited about the potential news regarding the project that has tied up Blizzard's most advanced and talented programmers since 2006: Titan. Many of the same developers who made groundbreaking MMORPG games like Everquest and World of Warcraft have had their hands on Titan the last 6-7 years.
I have been actively playing MMORPGs since 1999, and at that time, the market for MMORPGs was about 1 to 1.5 million people. Today the MMORPG market reaches out to more than 70 million people, and it is continuing to increase year to year. The problem is most MMORPGS over the past 9-10 years have been mere copies of one another; nothing is original and this massive MMORPG market is spread among 50 or so MMORPG games at the moment.
Much like its developer's predecessors, Project Titan has the potential to be groundbreaking and capture a large portion of this 70 million person market. The highest MMORPG market share belongs to League of Legends (which is roughly 12-13% of the market share), but for comparison, back in 2000 Everquest had over 80% of the market share and WoW in 2005 and 2006 commanded over 50% of the market share.
Given the drastic increase in MMORPG competition, I believe it is impossible for any groundbreaking MMORPG to command that amount of market share, but I do believe the potential to command 20-25% is there if the game is groundbreaking. Given reasonable assumptions regarding increases in MMORPG market share (especially internationally) over the next five years this could mean a 20 to 25 million subscriber base for a given game if it redefines the MMORPG industry like EQ and WoW did.
Many questions still remain about Project Titan, and they may not have any news about it tomorrow. Still I think this stock will perform better over the next few years than it did in prior years because I believe the gaming industry is going to perform better as a whole.
With gaming consoles like the Xbox 720 and PS4 forecasted to be out at the end of this year or early next year, along with new-name consoles like Google's OUYA and the Steambox (Valve's console) I think investors will start to see more robust sales in the gaming industry as a whole. One point I am confident about is that the overall investor confidence in the gaming industry will improve over the next few years, and I think many of the solid, financially sound companies like ATVI will finally see some real gains because of it.
As far as what the stock will do tomorrow... who knows. The stock has been flat despite how well the company has performed, most likely due to how flat the gaming industry as a whole this year.
We will see what happens- hope you enjoyed the read.