Activision Blizzard In A Battle Royale Of Its Own Against 'Fortnite'

Activision Blizzard, Inc. ATVI closed the week up 4.52 percent after reporting a first-quarter earnings beat Thursday. Even without any major releases, Activision had a strong quarter that saw 24-percent year-over-year EPS growth. The video game manufacturer's earnings did not go as smoothly as planned: Dow Jones accidentally leaked the wrong sales figures a few hours ahead of the print.

The video game space as a whole is one of the most exciting growth categories to watch. Of $1.8 trillion in consumer spending tracked in 2017, video games were the highest growth segment, driven by the incredible success of Nintendo Ltd/ADR NTDOY's Switch, the fastest-selling gaming console of all time, according to NPD Group.

'Fortnite' has been the hottest gaming story of the year and is leading to the rise of battle royale-style games that could prove to be a seminal moment for the industry. All eyes were on Activision Blizzard's earnings to gauge the impact of 'Fortnite,' a free play game that's viewed by many as Activision's most significant competition.

When asked on the earnings call whether the free play game is a threat to Activision’s $60-per-game model, CFO Spencer Adam Neumann acknowledged that it has seen some near-term impact from battle royale-style games, but said the genre will ultimately lead to innovation and expansion in the industry.

“It’s not only bringing the the younger audiences and millions of new gamers (in the shooter genre), where we are already a leader in the space, but importantly, it’s also highligting the ability to successfully bring immersive gaming experiences like battle royale to mobile in both Western and Eastern audiences,” he said.

The Ratings

Bank of America analyst Justin Post reiterated a Buy rating and lowered the price target from $77 to $76.
Credit Suisse analyst Stephen Ju reiterated an Outperform rating and raised the price target from $84 to $85.
Stifel analyst Drew Crum reiterated a Buy rating and a $77 price target.
William Blair analyst Ralph Schackart reiterated an Outperform rating.
Jefferies analyst Timothy O’Shea maintained a Buy rating with an $86 price target.

Activision Blizzard's 'Fortnite' Competition

BofA's Post suggested that Activision’s appreciation of the battle royale mode will likely be incorporated into the company’s future console and mobile titles.

“The investor takeaway from 1Q could be that there is less 2018 upside potential due to 'Fortnite,' but commentary suggests 2H titles are on track, a positive,” the analyst said.

BofA expects numerous games to add battle royale modes in the fourth quarter.

Credit Suisse's Ju downplayed the possibility of "Fortnite" materially affecting Activision’s business, stating that established entertainment franchises do not go away in 14 days.

Jefferies' O’Shea said Activision’s strong results suggest that "Fortnite' concerns are overblown, despite it being the hottest game he's seen in years.

“'Fortnite' is more about expanding the market than cannibalizing it. The game is attracting younger players who are newer to multiplayer gaming."

"Call of Duty: Black Ops 4," which is set for an Oct. 12 release, will likely also have its own battle royale mode, O'Shea said.