Mobile Monetization Makes Its Mark In Activision's Q3 Beat

Digital and mobile monetization played a big role in Activision Blizzard, Inc. ATVI's third quarter earnings beat, Baird Equity Research's Colin Sebastian said in a research report.

The video game company reported a 17 percent year-over-year increase in its third quarter revenue to $1.9 billion after the close Thursday. The revenue number which came in higher than the $1.7 billion Sebastian was modeling. (See Sebastian's track record here.)

The outperformance can be attributed to digital downloads, which exceeded 50 percent of total sell-through — the highest mix in the company's history, according to Baird. In-game purchases exceeded $1 billion in revenue, which also marks the highest level ever and showcases the "increasingly recurring nature" of the business model, Sebastian said. 

Activision acquired King in 2015 and the segment delivered 15 percent year-over-year revenue growth in the quarter, the analyst said While King did see a quarter-over-quarter decline in monthly active users, the total number of paying players rose for the first time since the first quarter of 2016.

During a post-earnings conference call, Activision's management highlighted Friday's release of "Call of Duty WWII," which showed a higher mix of digital downloads for pre-orders versus all prior "Call of Duty" releases. This bodes well for the fourth quarter and sets up a scenario in which the company could report "significant upside" to management's "conservative" guidance, Sebastian said. 

Beyond the fourth quarter, ongoing advertising tests in the King mobile division are seeing strong results and a ramp in advertising could turn aggressive in 2018, the analyst said. The eSports segment could prove to be another growth opportunity ahead of the launch of the "Overwatch League" in January, which is backed by "high-profile sponsorships, providing some added legitimacy," according to Baird. 

Activision is one of Sebastian's top picks in the video game space due to a combination of industry-wide favorable trends and company-specific drivers and catalysts, including the "CoD WWII" release.

The analyst maintains an Outperform rating on Activision's stock and raised the price target from $68 to $75.

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Photo courtesy of Activision.