jebmo’s posthaven

In my previous article about Activision Blizzard (NASDAQ:ATVI), I described the major catalysts that will push the company's stock higher and open new opportunities for investors. Since that time, Activision's shares have fallen by ~11%, but I still believe that Activision Blizzard is a great value play for the long-term and have a few reasons to think that way.

If we look at the earnings results for the third quarter of 2016, we will see that Activision Blizzard strongly outperformed its expectations and improved its major metrics Y/Y. Revenues for the period were $1.57 billion (+51% Y/Y) and EPS beat analyst expectations by $0.07. The company also has solid operating and net margins of 20% and 13%, respectively, and its ROIC is ~10%.

In addition, in late November, the company released its 8K filing, which described new employment agreement between Activision Blizzard's CEO Bobby Kotick and the company itself. This is an important document that a lot of Seeking Alpha contributors missed, which will play one of the biggest roles in the company's success in the next 4 years. According to the agreement, the Compensation Committee is going to grant its CEO the additional bonuses beyond its standard salary and already existing bonuses in the next 4 years, if the company manages to create more value for the shareholders during that period ("2020 Long Term Performance Grant Target Value"). In the graph below we could see CAGR rate in the left column and the payment that Mr. Kotick might receive if he manages to boost Activision Blizzard's stock:

Source: 8K Filling

In the conservative scenario, if Activision Blizzard achieves CAGR of 6% by the end of 2020, Mr. Kotick will receive 90% in bonuses to the already existing payment agreement. The aggressive scenario includes the possible annualized return of 25%, in which Mr. Kotick will receive a whopping increase of 500% in bonuses. In both cases, shareholders could expect the serious dedication from the executive team to create value, from which all parties will benefit. As a shareholder myself, I don't mind if the CEO gets a big paycheck if he makes me a great amount of money too.

Also, the aggressive scenario is very realistic. In the last 5 years, Activision Blizzard's stock increased from ~$12 per share to ~$40 per share, which represents an annual return of ~27%:

However, we need to understand that in order to keep the current pace of growth and to secure the 25% goal by 2020, the company will need to do a couple of another acquisitions and monetize new products, which will help it to increase its presence in the industry and benefit from the growth of gaming market.

In my opinion, there are a number of different opportunities that Activision Blizzard might pursue in order to achieve its major goals and create value in the long-term.

Activision and eSports

Activision as a publisher is famous mostly for its Call of Duty series. However, in the last few years, it constantly diversified its portfolio of franchises and now has a number of income streams that help it to stay afloat and bring profits for its shareholders. Its hit game Destiny in the day of its release netted more than $500 million and set the record for the industry. I believe that the already existing IPs along with the rise of paid downloadable content will help Activision to set new records and surprise its investors in a positive way.

Besides that, the company's recent purchase of gaming streaming service MLG will help it to create one of the biggest gaming media holdings in the industry and provide the premium content for the gamers. Taking into account the fact that the major goal of the platform would be to stream eSports tournaments, we might expect the growth of the competitive gaming community, which will play a big part in Activision's success in the future. Different studies suggest that eSports market will be worth around $5 billion by 2020 and, in my opinion, this is a great opportunity for Activision to capitalize from its growth.

Blizzard: Franchising At Its Best

Blizzard's recent hit Overwatch attracted more than 20 million users in the first five months since its release and set a new record in the first-person-shooter genre by user base growth. The company's recent bet to develop new IPs and diversify the existing ones will help it to target different audiences and drive growth from different areas of gaming.

Also, in summer, the company released its first ever movie based on its Warcraft universe, which became a hit among Asian consumers and made a hefty profit for Blizzard. With the budget of $160 million, the movie made $430 million in gross sales and opened up a lot of new opportunities for the company in the movie business. Considering such a success, we also might expect from Blizzard to explore the Asian-Pacific market more deeply.

King: The Growth is Already Here

Mobile gaming only recently became a part of Activision Blizzard business portfolio. A lot of people were skeptical about the fact that the company spent more than $5.9 billion to purchase King Digital in late 2015. However, since that time, Activision Blizzard's stock greatly appreciated in value and the company itself improved its financial metrics. Since the acquisition, its FCF nearly doubled to $2.93 per share in comparison with $1.46 in 2015, and the growth of mobile market will help the company to acquire new users and unlock value for the shareholders.

As we can see, Activision Blizzard has a lot going on. New employment agreement with its CEO will help the executive team to focus more closely on the opportunities in different gaming areas and improve its already existing businesses. I feel positive about the future of the company and still consider Activision Blizzard a solid buy for the long-term.

Disclosure: I am/we are long ATVI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.