2. Corporate Valuation Report
Activision
67%
Blizzard
26%
Distribution
7%
2013 Net Revenue
Activision Blizzard Distribution
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
ATVI S&P 500 NASDAQ 100
Activision Blizzard, Inc. (Nasdaq: ATVI) | Recommendation: HOLD
Current Price Target Price Sector: Technology
$ 21.21 $ 22.38 Industry: Software & Programming
Business description
Activision Blizzard is the currently largest and most profitable game
publisher and developer of video game, handhold game and online PC
game. It was established in 2008 by merging Activision Publishing Inc.
and Blizzard entertainment. The business of Activision Blizzard is
consisted of two separate parts, Activision Publishing, Inc. (“Activision”)
and Blizzard Entertainment, Inc. (“Blizzard”). In 2013, Activision and
Blizzard accounted to 67% and 26% of revenue of whole company
respectively.
Activision
On the Activision Publishing lnc. side, which is focus on developing and
publishing video game on various platforms, such as XBOX 360 and XBOX
ONE of Microsoft, PlayStation3 and PlayStation4 of Sony, Wii U and Wii of
Nintendo Company for home playing. All products from above platforms
are also provided in handle and mobile platform such as the Nintendo
3DS ("3DS"), Nintendo Dual Screen ("DS") and Sony PlayStation Vita
handheld game systems. There are various star products of Activision.
The main revenue of Activision is comes from Call of Duty series and
Skylander franchise. The latest version of Call of Duty, which was
released in last quarter of 2013, won the #1 best-selling game and also
the #1 best-selling game for new generation platform. Skylander
franchise is another long-term investment and profitable asset of
Activision. Since 2012, the first generation of Skylander launched in
market, it has accumulated 2 billion around the world and 175 million
Skylanders toys sales until December 31th, 2013. Also Activision
developed a new first-view shooting game－Destiny with building long-
term corporation with Bungie. In order to rich the list of products,
Activision also developed and maintained “Goldeneyes 007” and
“Transformer’ series even they held low market shares and kept low
growth rates.
Blizzard
On the other side, Blizzard entertainment is concern on developing online
ATVI Performance
All raw data used in charts, graphs and
calculations is sourced from Bloomberg
3. Corporate Valuation Report
ASAC II LP
15%
FMR LLC
7%
WELLINGTON
MANAGEMEN
T
7%VIVENDI
UNIVERSAL
SA
6%BLACKROCK
4%VANGUARD
GROUP INC
2%
DAVIS
SELECTED
ADVISERS LP
2%
INVESCO LTD
2%
activision
blazzard
36%
OTHERS
19%
game market and keeping its dominant position in subscription-based
MMORPG (massive multiple online role-play game) category and PC
online category. In the global market, Blizzard built a great reputation
among gamers through its three products; StarCraft series, World
Warcraft series and Diablo series in past 20 years. On January 2014, the
new game Heroes of the StormTM, a free-to-play digital collectible card
game, which lunched for Windows, Mac and IPAD consoles and rapidly
increased to 10 million register customers currently. Diablo III has sold
more than 20 million copies worldwide across all platforms since its
release in March 2012. World of Warcraft remains the #1 subscription-
based MMORPG, with approximately 6.8 million subscribers. In addition
Blizzard also developed an online game service, Battle.net. It plays
several roles, such as 24/7 gamer services, digital distribution and social
platform for gamers in 4 major games. Blizzard runs their business
worldwide through its 4 main products. There are various ways to
generate revenues from major products, including: sales of subscription
cards, physical and digital products of PC games; and additional charged
services in the World of Warcraft; and outsourcing software distribution
to third-party oversea companies.
Shareholder Structure
In October 11th, 2013, the ownership of Activision
Blizzard was changed. It repurchased 429 million
common shares from Vivendi by 5.83 billion cash
payment or $13.60 per share. This repurchase
transaction payment was consist of 1.2 billion of
cash, net proceeds from a $2.5 billion secured loan,
which due to October 2020, and the net proceeds
from a $1.5 billion with 5.625% unsecured senior
notes due September 2021 and $750 million of
6.125% unsecured senior notes due September
2023. This transaction made a further influence on
Activision Blizzard’s operation and financial
condition in coming years. Otherwise, this
repurchase liberate Activision Blizzard from Vivendi
by total 36% of entire shares. Additionally, Robert
A. Kotick, Activision Blizzard’s Chief Executive
Officer, and Brian G. Kelly, Chairman of Activision
Blizzard Board of Directors founded the second shareholder, ASAC II LP.
This independent structure gave Activision Blizzard more freedom to
operate their business but the heavy debts also limited its development
in the future.
4. Corporate Valuation Report
0
1
2
3
4
threat of
entry
bargaining
power of…
bargaining
power of…
subsititues
rivalry
Industry Analysis
Activision Blizzard is currently the largest and most-profitable
independent videogame publisher in North America and Europe.
Activision Blizzard is holding several most popular game series in the
world, Call of Duty Ghosts - #1 title on next-gen consoles; World of
Warcraft - #1 subscription massively multiplayer online role-playing game
as of 12/31/2013; and StarCraft II: Heart of the Swarm - #1 PC game in
North America.1 All of ATVI’s biggest franchises tend to keep gamers
engaged for significantly longer than competitive offerings. In FY2013,
ATVI had the highest revenue of $4.3B, the highest net income of $1.01B
and the highest free cash flow of $1.19B over other major competitors –
Electronic Art, Take-Two Interactive, Nintendo and Konami.2 Because the
gaming (software and programming) industry in America is mature
enough, its growth rate is estimated to be 4% based on future U.S. GDP
growth rate estimates. ATVI is going to release two sequels of Call of Duty
and World of Warcraft during November in 2014 which will definitely
stimulate ATVI’s future sales and increase its overall influence in the
marketplace.
Comparative Analysis
Porter’s Five Forces
Threat of New Entrants (Low): Due to increasing returns generated from
making games and being game agent in gaming industry, more and more
new entrants is constantly entering the market. It requires relatively low
cost to enter the market. As the largest game making and publishing
company in the world, ATVI minimizes this threat by building a large
economics of scale and a wide product differentiation and maintaining its
dominant position in the market. Comparing to entry, it is much harder to
stay in the market by maintaining quality and even better. ATVI is keeping
a high level of quality and even innovating its famous game series while
most new entrants failed maintaining good quality and got kicked out of
market. Thus, it automatically lower the company’s risk to the threat of
new entrants.
Threats of Substitute Products or Services (Low-Moderate): The
Activision Blizzard is famous for its first-person shooter game, real-time
strategies game, and massive multiplayer online role-playing game.
1
Activision Blizzard Annual Report 2013
2
http://www.fool.com/investing/general/2014/08/26/3-reasons-why-activision-blizzard-is-the-king-of-v.aspx
Porter’s Five Forces Analysis
5. Corporate Valuation Report
Blizzard benefit from first two types of games by selling game discs and
game relative products. First two types of games have long history since
the console game period. They are considered as classic game in
customers’ view. The model and market of games is mature. All
substandard products of these two types in the market will not be able to
compete with Blizzard. So far, Blizzard can be ranked as moderate in
substitute. However, World of Warcraft from Activision Blizzard make it
become the most successful MMOPG game company. It earned high
reputation from customers in world of Warcraft around world. Above all I
would like to give “low” ranking of Blizzard in substitute option.
Bargaining Power of Buyers (High): Customers’ powers have increased
since 2000. Based on the high information flow, customers can search
tremendous and relative information that is specific in their interests
through magazines, digital newsblog and social media. Customers keep
looking for high quality games and have low costs of switching. The
better quality direction from customers force industry spend high portion
of capital in developing and researching. In developing countries, the
rapidly increasing pc users’ volumes enlarge the power of customers in
local market price. On the other hand, the brand loyalty is relative low in
game market. Customers can easily move to another public games when
they can earn higher utility in others. Game companies set up building
their brand reorganization which also resulting in high cost of marketing.
Consequently, the margin power of buyers stays in high level.
Bargaining Power of Suppliers (Low-Moderate): Activision Blizzard Inc.’s
products are primarily produced by its own teams. It contains several
studios that develop and innovate new video games for ATVI to publish.
Since the majority of video games that has being published by ATVI are
made by its own teams and studios, suppliers have little influence on
developing video games’ contents other than building and packaging
video game disks. The level of supplier power is not tend to be high
because there are tons of companies that can provide building and
packaging video game disks for ATVI. Although the majority of games are
made by its own, ATVI still publishes many video games for other game
making companies. ATVI want to continue attracting and keeping the
best games from other game making companies which hold some power
here.
Rivalry (Moderate): There are tons of different software and
entertainment companies that are developing and publishing video
games like ATVI. The game industry is intensely competitive and there are
competitors competing with ATVI in every type of video games. ATVI’s
most successful game series are Call of Duty and World of Warcraft. In
6. Corporate Valuation Report
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
2008 2009 2010 2011 2012 2013
EBIT Margin EBITDA Margin
Net Profit Margin
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
3,800.0
4,000.0
4,200.0
4,400.0
4,600.0
4,800.0
5,000.0
5,200.0
Revenue
Revenue Growth Rate
Industry Average Revenue Growth Rate
these two types which are first-person shooter and massively multiplayer
online role-playing game, ATVI dominate the market and no one can
actually compete with it. Electronic Arts is the largest competitor of ATVI,
and they compete with each other in nearly every types of video games.
ATVI is dominating EA because ATVI continues its popular game series
such as Call of Duty and Guitar Hero to maintain old customers and
innovates new games such as World of Warcraft (by Blizzard
Entertainment) to attract new customers. Knowing what exactly
customers and players want is the key to build customers’ loyalty to
against rivals. As the world’s largest game developing and publishing
company, ATVI is not strictly affected by new entrants to the game
industry.
Financial Analysis
Sustainable Revenue Growth
From FY2009 to FY2012, ATVI’s revenue continued to increase from
$4,279 million to $4,856 million. The revenue growth rate are tend to be
high of more than 40% in FY2009 and the revenue was keep increasing
from FY2009 to FY2012, the reasons are because the two most popular
game series – Call of Duty and World of Warcraft have been released for
4, 5 years and have attracted tremendous amount of players until FY2009
and FY2010, plus Wold of Warcraft has reached its peak of 12 million3
subscriptions between FY2009 and FY2010. With a 4% growth rate
estimates, revenue will increase to $4,766 million in FY2014 and 4967
million in FY2015.
Low Revenue Growth Rate and Revenue Decline in FY2013
ATVI’s revenue growth rates are all lower than industry average growth
rates4 because there are so many small companies that have relative
higher revenue increases than ATVI in the software and programming
industry. Both ATVI and industry average revenue growth rate curves are
moving in a similar pattern predicts that the industry is obviously being
influenced by ATVI. In FY2013, ATVI’s revenue decreased at a rate of 5.62%
from $4,856 million to $4,583 million. The reason is that ATVI
repurchased 429 million common shares from Vivendi by paying $5.83
billion in cash in FY2013. Revenue growth rate is tend to stop declining
and start rising up in FY2014.
3
http://www.nextgeekuk.com/section/gaming/world-of-woecraft-fixing-the-warcraft-franchise
4
All industry averages were sourced from Bloomberg.
ATVI Historical Margins
ATVI Revenue and Growth
7. Corporate Valuation Report
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
EBITDTA
Margin
EBIT Margin Profit Margin
ATVI Industry Average
0
100
200
300
400
500
600
R&D Expenditure
Activision
Blizzard
Dassault
Systemes SA
Zynga
Linkedin
Cerner
Yandex
Historical Margins and Margin Comparison
ATVI’s EBIT margin, EBITDA margin, and net profit margin all rapidly
increased from FY2008 to FY2011. EBIT margin grew from -4.63% in
FY2008 to 29.94% in FY2013; EBITDA margin grew from 13.91% in FY2008
to 36.81% in FY2013; and net profit margin grew from -3.54% in FY2008
to 22.04% in FY2013. Great increasing in margins from FY2008 to FY2013
and the stabilization from FY2011 to FY2013 reflect the company’s
successful operation over the last few years. By comparing to the
industry average margins, ATVI’s FY2013 EBITDA margin of 36.81% is
greatly higher than the industry average EBITDA margin of 27.1%. ATVI’s
FY2013 EBIT margin was 29.94%, and it was also significantly above than
the industry average of 17.86%. Net profit margin for ATVI in FY2013 was
22.04% and it was also higher than the industry average which was
16.37%. All these margin comparisons show that ATVI is strictly
outperforming the industry.
Margins Increase in FY2009, FY2010, and FY2011
In FY2009, FY2010 and FY2011, ATVI’s all three margins increased by
about 10% or even more than 10% each year (shown in the table). This is
because the succession in selling World of Warcraft and Call of Duty in
FY2009 and FY2010 significantly increased the revenue during those fiscal
years. As these hot game series are tend to be constant and saturated
from FY2011 to now, the margins are also tend to be stable in these fiscal
years.
Profit Margin Decreases in FY2013
The net profit margin for ATVI dropped from 23.66% in FY2012 to 22.04%
in FY2013. Because the revenue decreased at a rate of 5.62% to $4,583
million in FY2013 from $4,856 million in FY2012 mainly caused by the
ATVI’s repurchase of common shares from Vivendi by paying $5.83 billion
in cash in FY2013.
Innovation from R&D
The R&D expenditure for ATVI was $584 million in FY2013 which was
higher than other companies’ R&D expenditures in the industry.
Maintaining a high R&D expenditure allows ATVI to perform aggressive
investment and develop innovative products. A high R&D expenditure is
necessary for a company in software and programming industry, because
high R&D expenses allow a company to research and develop new
featured products and technologies. ATVI’s high R&D expenses ensure
that ATVI is able to develop three to four qualified and innovative games
2009 2010 2011
EBIT
Margin
-0.61% 10.55% 27.93%
EBITDA
Margin
14.07% 22.17% 37.08%
Net
Profit
Margin
2.64% 9.40% 22.82%
Margin Comparison
2009-2011 Margins
Innovation from R&D
8. Corporate Valuation Report
0
500
1000
1500
2000
2500
3000
3500
Gross Profit
Activision
Blizzard
Dassault
Systemes SA
Zynga
Linkedin
Cerner
Yandex
46.09
52.19
62.73 65.77 66.59 69.07
0
10
20
30
40
50
60
70
80
Gross Margin
Gross Margin
-60
-40
-20
0
20
40
60
80
2009 2010 2011 2012 2013
Days
Cash Conversion Cycle
Activision Blizzard industry average
every year. This a major reason why ATVI can maintain its highest
revenue over other competitors every year.
High Gross Profit and Gross Margin
ATVI’s gross profit in FY2013 was $3,052 million which was the highest
among all the competitors. Gross profit increased from $1,972 million in
FY2009 to $3,052 million in FY2013. High R&D expenditures in the last
few years influenced this increase. The gross margin (Gross
Profit/Revenue) for ATVI grew from 46.09% in FY2009 to 66.59% in
FY2013 and it already increased to 69.07% currently in 2014. ATVI was
increasing the ratio (Gross Margin) over the past five years by cutting the
cost of sales year by year. The gross margin was not influenced by the
repurchase of common shares in FY2013 because the gross profit
decreased by $142 million which is less than the decline in revenue ($273
million). A high gross margin of 66.59% in FY2013 means a high ratio of
gross profit over revenue which indicates ATVI can retain 66.59% of total
sales revenue after incurring the cost of sales. High gross margin gives
ATVI a sustainable financial situation.
Cash Generating Ability
Cash conversion cycle is calculated by subtracting days payable
outstanding from the summation of days sales outstanding and days
inventory outstanding. ATVI’s average cash conversion cycle decreased
from 63.3 days in FY2009 to 8.6 days in FY2013. This is mainly caused by
reductions in days sales outstanding and increases in days payable
outstanding year by year. From FY2009 to FY2011, cash conversion cycle
for ATVI declined rapidly because ATVI greatly reduced the days sales
outstanding from 73.1 days to 50.7 days and increased the days payable
outstanding from 49.6 days to 76.2 days. Although ATVI’s cash conversion
cycle declined to 8.6 days in FY2013, it is still greater than the industry
average which means ATVI is outperforming the industry in cash
generating ability. Two similar curve patterns also indicates the dominant
position and influential power of ATVI within its industry.
Liquidity
The current ratio for ATVI was 2.6x and quick ratio for ATVI was 2.1x in
FY2013. The inventory turnover and receivable turnover for ATVI in
FY2013 were 8.1x and 7.5x. These two turnovers are not low enough to
say ATVI is very safe in meeting its short-term obligations. Another
reason for ATVI’s high current ratio and quick ratio is its currently high
debt level caused by a large debt incurred in FY2013.
High Gross Profit
9. Corporate Valuation Report
0
2
4
6
8
10
12
14
16
2010 2011 2012 2013
ROIC vs. WACC
ROIC (%) WACC (%)
2010
DPS=0.15
2011
DPS=0.17
2012
DPS=0.18
2013
DPS=0.19
2014
DPS=0.20
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2010 2011 2012 2013 2014
Dividend Yield in 2010-2014
Sustainable Dividend per Share and Dividend Yield
The dividend per share for ATVI was $0.15 in FY2010 and it increased at a
constant rate to $0.19 in FY2013 and already approached $0.20 in 2014.
Keeping increasing in the dividend per share provides shareholders
higher and higher returns. ATVI gives its shareholders or investors a good
reason for investing and holding ATVI shares. The dividend yield
increased from 1.21% in FY2010 to 1.69% in FY2012 which was caused by
increasing in dividend per share since the share price wasn’t change a lot
from FY2010 to FY2012. The dividend yield decreased to 1.07% in FY2013
due to the repurchase of common shares. Repurchase of 429 million
common shares reduced the common shares outstanding and thus
greatly increased the price per share. Because dividend yield = dividend
per share / share price, the increase in price per share from $14 to $23
effectively reduced the dividend yield in FY2013 and 2014. However, an
increase in share price is beneficial to shareholders as well as rising in
dividend per share.
ROIC vs. WACC
Return on invested capital for ATVI rapidly increased from 9.5% to 15.11
from FY2010 to FY2011 due to the success in Call of Duty and World of
Warcraft (NOPLAT increased 64.03%). And it decreased in FY2013 to
14.31% due to the repurchase by paying a significant amount of cash
(NOPLAT decreased 8.05%). We excluded the FY2009 ROIC for ATVI
because it was negative caused by an interest tax income instead of an
interest tax expense. Weighted average cost of capital for ATVI stays
constant through the last 5 years which is a good sign for a company.
ROIC is greater than WACC means that ATVI uses it invested capital
effectively and growth will add value.
Growing DPS
10. Corporate Valuation Report
0
2,000
4,000
6,000
8,000
2014 2015 2016 2017 2018 2019
Forcast Revenue
Forcast Revenue
Valuation
Target Price
We evaluate the price of Activision Blizzard by two valuating model:
Discounted Cash Flow and relative valuation. Target price ($22.38) was
calculated by averaging price from DCF model ($20.52) and RV model
($24.24).
DCF Model
Discounted Cash flow valuation method value future target price through
future after-tax cash input company’s capital. It is consisted by present
value of future forecast cash flow and terminal value at a perpetual
growth rate, which is also predicted, and then divided by the number of
common shares outstanding after subtracting net debt of Company. In
order to find out target price in DCF model, Firm Value The discounted
rate in DCF model is taken from weight average cost of capital.
Stable Revenue Growth
Future cash flows are strongly relative to revenue growth rate and cost of
good sell rate. We forecast 4% as fixed future growth rate are depend on
the high correlation between our sales and economic condition and the
past performance of Activision Blizzard when they released new products
to market. The reverse of revenue in 2013 is the result of high-level debt
from repurchases transaction. Then we also assumed perpetual growth
rate is 4%, which is based on the industry average growth rate and future
US Real GDP growth rate estimates by research of Federal Reserve Bank,
which scope of 2.1% to 2.3% in 2014 and 2.5%-3.0% under the sluggish
recovery. Additionally, the performance of technology industry is always
better than market average. For these reasons, we predicted perpetual
growth rate is 4%. Our assumption of growth rate is equal to perpetual
growth rate because of stable revue growth and increased interests of
Activision Blizzard.
Weighted Average Cost of Capital (WACC)
We calculate WACC by Capital Assets Pricing Model (CAMP). We use 10
years treasury rate of 2.48% as risk free rate and market premium of 5.15%
by subtracting the risk free rate from the market return rate from S&P
500 index. The calculation of Beta for ATVI can be separate two parts.
First we find the Beta 0.98 from financial report and then we find the
unlevered beta by dividing 1 plus after tax D/E ratio. We averaged the
unlevered betas from ATVI and its main competitors. We used the
averaged unlevered beta for ATVI levered beta by multiplying 1plus after
10 Year Treasury 2.48%
Market Premium 5.15%
ATVI Beta 1.80
Cost of Equity 11.74%
Cost of Debt 3.52%
WACC 8.33%
WACC
Final Target Price
11. Corporate Valuation Report
1.1
7.6
2.82.1
17.6
5.7
0
5
10
15
20
PEG EV/EBITDA EV/Sales
ACTIVISION BLIZZARD Average
tax D/E ratio. ATVI beta was calculated to be 1.8. Input all relative
number into CAPM, we figure the cost of equity was 11.74%. On the
other hand, the cost of debt (before tax) was 4.6%, which was calculated
from a weighted average of interest rates. The tax rate was assumed of
23.43%. We estimated the WACC of 8.33% by combine the weighted
average of cost of equity and after-tax cost of debt.
Result of DCF
We discounted future cash flow by WACC as discounted rate and add
present value of term value at a perpetual growth rate and enterprise
value. At the end we divided the sum by outstanding shares to figure the
target price of $20.52.
Relative Valuation
The relative valuation was calculated and analyzed by using the following
three multiples: forward PEG ratio, forward EV/EBITDA, and forward
EV/Sales. We selected several US companies as peer companies. These
peer companies are all in the same industry as ATVI, and some are direct
competitors.
PEG Ratio
The first multiple used by us was PEG ratio, because we considered that
PEG ratio is a better multiple than P/E ratio. PEG ratio is a stock’s price-
to-earnings ratio divided by the growth rate of its earnings for a specified
time period. The PEG ratio is used to determine a stock’s value by taking
the earnings growth rate into account. A high P/E ratio might make a
stock look like a good buy, but it is not guaranteed without taking the
earnings growth into account. The lower the PEG ratio, the more the
stock might be undervalued given its earnings performance. ATVI’s PEG
ratio of 1.1x is the lowest among all other peer companies.
EV/Sales
The second multiple that we decided to use was EV/Sales. EV/Sales is a
valuation measure that divides the enterprise value of a company by the
company’s sales. EV/Sales is a capital-structure neutral measurement
compared to P/E ratio and PEG ratio. EV/Sales valuation is an appropriate
choice for ATVI because this multiple is indicative in the industry. We
usually can say that the lower the EV/Sales multiple a company has, the
more undervalued and attractive the company is. ATVI has the lowest
EV/Sales multiple of 2.8x among all peer companies.
Peer Companies and Multiples
Multiple Comparison
Discounted Cash Flow
12. Corporate Valuation Report
EV/EBITDA
The last multiple chosen by us for our valuation was EV/EBITDA.
EV/EBITDA multiple is used to determine the value of a company and it is
calculated by dividing enterprise value by the company’s EBITDA.
Because EV/EBITDA is also a capital-structure neutral multiple, it can be
used to directly compare peer companies with different capital structures
(different levels of debt). EV/EBITDA also excludes the influence of
different tax rates, depreciation and amortization methods. Thus,
compared to P/E ratio, EV/EBITDA is more accurate and more widely
used. Generally the lower the EV/EBITDA a company has, the more
undervalued that company is. ATVI has an EV/EBITDA of 7.6x which is the
lowest among all peer companies.
Forward Multiples and Relative Valuation Target Price
We used forward PEG ratio, forward EV/Sales, and forward EV/EBITDA to
perform the relative valuation. These three multiples for ATVI are all
lower than other peer companies and the industry average as shown in
the table. It is not reasonable to use the average multiples as our forward
multiples, therefore we directly took all these three forward multiples
from Bloomberg. By following all the calculation steps, the target price
obtained by using forward PEG (1.07x) is $26.10; the target price
obtained by using forward EV/Sales (3.30x) is $23.32; and the target price
obtained by using forward EV/EBITDA (9.64x) is $23.31. Finally, we
divided the sum of all these three target prices by three to get the
relative valuation target price which is $24.24.
Multiples Valuation
13. Corporate Valuation Report
0
50
100
150
200
250
StockPrice
ATVI SPY
68%
70%
72%
74%
76%
78%
80%
82%
2011 2012 2013
Revenue of 3 main products
0
2
4
6
8
10
12
2012 2013 2014 2015
Millions
Subscribers of World of Warcraft
Risk Analysis
Risk in Economy
Game products are not necessary to customers’ daily life, it is a
discretionary purchase of customers. Depend on high correlation
between the stock prices of Activision Blizzard and S&P 500 ETF Trust
(0.88). When the economic condition goes down, stock performance
would fall quickly, vice-versa.
Risk in Platform Transition
Most revenue of Activision is based on products, which provided for
platforms, such as Xbox, PlayStation and Wii. Every time new platform
announced or introduced to the market, the sales of Activision’s current
products would grow slowly or even decrease until the new generation
platform are achieved widely by consumers. The new-generation
products may not offset lacking of cash inflow from published products.
Conversely, Activision Blizzard has to finance fund to develop new-
generation products, which are available in new platform. During this
period, company market the current-platform products in discount price
and also incur extra cost in developing for next-platform without
immediate revenue.
Risk in Intensive Revenue
Depends on 10k of 2013, the total revenue of Activision Blizzard are
comes from 3 major products; World Warcraft, Call of Duty and Skylander.
Sales of these 3 products account 80％, 72% and 73% in 2013, 2012 and
2011 respectively. It is too risky to concentrate major revenue into
limited products. There is a potential problem about World Warcraft.
The Subscriber churn of World Warcraft brings a risk to the company. In
quarter 2 financial report, World Warcraft has 6.8million subscribers but
there were 7.6 million subscribers in 31st December，2013 and 9.6
million subscribers in 2012. The decrease subscribers or sales of each
product have significant influence on our business. Our financial
condition, results of operation, cash flow and liquidity could be materially
adversity effected.
Risk in Debt Burden
Because of Purchase Transaction, Activision Blizzard increased their debt
burden. The credit agreement include $2.5 billion secured term loan,
1.5billion unsecured senior notes with 5.625% interests rate, which due
September 2021, and 750 million unsecured senior notes with 6.125%
High Correlation with Market
14. Corporate Valuation Report
42%
25%
13%
20%
Payment Combination
long-term
loan
2021
notes
2023
notes
interests rate, which due September 2023. It increased D/E ratio to 70.8%,
which limited the adaptability of company to uncertainly changes in their
business and industry environment. In addition, the high level of debt
also limits extra financing for capital expenditures, research and
development, and present relative disadvantage to competitors with
lower capital leverage.
Risk in Foreign Business
In the past years, Activision Blizzard expanded their business around the
world. Even though net revenue in Asian market account to 7% of entire
income, the repaid growth rates of market volume attract most
company’s attention. Activision Blizzard intend to spread their game
storm to Asian market especially in China and South Korea, it have to fact
to the foreign business risks specific in regulation approval, foreign
exchange rate and foreign economic condition. In most Asian countries,
game products are not allowed to introduce to market as far as they
received authorization from national government. For instance, in China,
if Chinese government revoke its approval for our products we sold in
China in the future would make a significant adverse impact Activision
Blizzard’s business in China even reverse entire financial condition. In
additional, most of international operations are based on local currencies.
There are several currencies through Activision Blizzard global business,
including; Euro, British pound, Japanese yen, South Korean won and
Chinese Renminbi. The exchange rate of last two currencies may play
opposite fluctuation to U.S. dollar. In order to hedge the future exchange
rate risk, Activision Blizzard always enter forward currency derivative
market by forward contract, future contract or options. However no one
affirm they would keep purchasing those program and avoiding risks
from exchange rate fluctuation.
Conclusion
ATVI has a leader position in its industry, along with healthy financials
and blockbuster launches of new series of games. Although there are
several good signals to show a good prospect of ATVI, low revenue
growth, high debt burden and potential risks balance the advantages and
the overall only gives a 5.5% upside potential from $21.21 to $22.38.
Thus, we recommend to hold currently.
USD-KRW Trend
USD-CNY Trend
15. Corporate Valuation Report
Appendix A: Historical Balance Sheet
ATVI Historical Balance Sheet
$ millions 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013
Assets
Cash & cash equivalents 2,768 2,812 3,165 3,959 4,410
Short term investments 477 696 360 416 33
Accounts receivables, net 739 673 649 707 515
Inventories 241 112 144 209 171
Deferred income taxes (396) (301) 76 (10) 161
Prepaid expenses and other
assets
1,500 1,440 986 993 951
Total current assets 5,329 5,432 5,380 6,274 6,241
Net property, plant &
equipment
138 169 163 141 138
Goodwill & intangibles 8,243 7,808 7,706 7,736 7,589
Long-term marketable
securities
- - - - -
Other assets 32 38 28 49 44
Total assets 13,742 13,447 13,277 14,200 14,012
Liabilities & equity 2009 2010 2011 2012 2013
Accounts payable 302 363 390 343 355
Other Current Liabilities 779 871 694 652 661
Deferred Revenue 1,426 1,726 1,472 1,657 1,389
Total current liabilities 2,507 2,960 2,556 2,652 2,405
long term liabilities 479 284 229 231 4,985
Deferred Revenue - Non-
Current
- - - - -
Other Non-Current Liabilities
Common Stock 12,376 12,353 9,616 9,450 9,682
Retained earnings (361) 57 948 1,893 2,686
Accumulated Other Comp
Income
(1,259) (2,207) (72) (26) (5,746)
Total liabilities & equity 13,742 13,447 13,277 14,200 14,012
