Activision Blizzard Stock Is A Compelling Buy Ahead Of Q4 Earnings

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For the most part, I really like Activision Blizzard going into its upcoming Q4 2015 earnings conference call, as investors have flooded out of the bigger entertainment software names in the past month. Activision Blizzard (Nasdaq:ATVI) has gotten a lot cheaper, which lowers expectations going into earnings as in-line guidance with a modest beat on earnings will be sufficient. I anticipate the stock to move somewhat higher as much of the bad news seems already baked in.
 

Source: Activision Blizzard stock price chart by amigobulls.com

A big chunk of Activision Blizzards footprint leans heavily towards PC titles and are sold via it’s Blizzard platform with the exception of the Call of Duty franchise, which is marketed via Steam. However, Black Ops 3 likely got hit with higher mix-shift to physical copies, which have lower gross margins as a result of the $350 PS4 bundles, which has damaging implications on sell through for the holiday quarter, i.e. the company could be hit with some sales headwinds. However, demand for the title outstripped expectations.

Physical game sales declined by 3% year-over-year in the December period according to NPD Group. However, NPD figures exclude digital and according to Wedbush analyst Michael Pachter, approximately 25% of game sales were digital in FY’15. There could be an earnings surprise in store, and with the close of the King Digital acquisition following regulatory approvals in South Korea, I’m starting to see the silver lining to the name (even prior to earnings). Expectation for core franchises excluding King Digital is 5% CAGR for the foreseeable 5-year period, according to Activision’s investor day. So, the long-term guidance seems relatively conservative for core game franchises excluding mobile. Furthermore, industry wide forecasts indicate that PCs are positioned to grow relatively quickly when compared to consoles, so the organic growth from incremental attach rates from add-in-boards would further indicate that PC game sales will continue to trend higher given the complimentary nature of GPUs and digital game sales. In other words, it’s worth following the hardware, and since ATVI is positioned strongly with mobile and PC franchises, I see a pathway to sustained 10%+ revenue growth given the long-term dynamics of PCs and VR.