Video Game Makers Are Winning the Lockdown

Video Game Makers Are Winning the Lockdown

Shares of video game stocks are back to new highs even as the broader market sinks. Investors have fallen back in love with the long-term investment story.

On Tuesday, Activision Blizzard (ATVI) reported blowout financial results led by big demand for its newest Call of Duty game. The action speaks to the dynamism of video game business.

It’s also a wake-up call for investors.

The reversal of fortune has been stunning. Two years ago, Activision shares were in free fall. At the time, the last Call of Duty, Black Ops 4, was a dud. Although the first-person shooter game had $500 million in sales in its opening three days, that number was the low end of expectations.

And when third-quarter financial results hit two weeks later, the gloom continued. Revenues fell across the board, from bookings to digital channel sales. The stock plunged.

Longer-term, there is no reason to believe the video game story is over. Entertainment, especially among millennials, is moving toward interactive titles. The majority of these are published by the leading studios: Activision, Take-Two (TTWO) and Electronic Arts, Inc. (EA).

Over the past couple of years, the outlier of this leading studio trend was Fortnite, an online videogame published by the much smaller Epic Games. The free-to-play cross platform blockbuster attracted 200 million players, according to a Bloomberg report. And online purchases of virtual goodies like extended lives added another $1 billion to the coffers.

The rest of the industry needed to respond or risk missing the boat, and it did. Call of Duty was revamped. The popular war franchise added a free-to-play version. Activision managers even moved the franchise to smartphones, with a free app.

At the time, Activision CEO Bobby Kotick explained revenues would be made up with in-app purchases. Some of these were as little as $1.49. Others, according to a CNN Business report, ranged all the way to $159.99.

Activision is no stranger to these adaptive practices. The company revolutionized video games by taking distribution online and monetizing player engagement. From Crash Bandicoot and Candy Crush on mobile, to Call of Duty and Overwatch online, selling avatar paraphernalia and extended gameplay options is the by-product of better engagement.

Engagement is why video game culture is far bigger than most non-gamers understand. Players are vested in the storylines and outcomes. When a game company like Activision has a bad title, the franchise can always be fixed by looking at the internal data and making subtle changes.

Sales during the first quarter reached $1.5 billion, up 21% year-over-year. Kotick says some of this was due to COVID-19. He explained that people staying indoors had a big impact on engagement and they spent more on in-app purchases.

Kotick was also quick to dismiss the decline in digital ad sales. He expects that spending will return, helped by Activision’s growing eSports businesses. With live sports in hiatus for the foreseeable future, there is a legitimate opportunity to capture more eyeballs and digital spend with eSports. Kotick says he expects more sponsorships and higher prices for broadcast rights.


Last year, the video game industry had a bad case of Fortnite indigestion. That has passed. Big players like Activision have the right product mix of paid and free games. Franchises that were on the wane have been revived with new storylines and more realistic imagery.

Activision shares trade at 24.2 times forward earnings. The market capitalization has risen back to $52.7 billion. The business, the biggest in the sector excluding console makers Microsoft (MSFT) and Nintendo (NTDOY), is getting ready to run again.

The stock traded up 5% to $72.30 on Tuesday night in the extended session. This is a great long-term play and investors should use pullbacks as opportunities.

Best wishes,

Jon D. Markman

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