Taking a look at a company like Activision Blizzard, Inc. (NASDAQ:ATVI), investors might wonder, why would a company with choppy growth, falling margins and overflowing debt draw a price-to-earnings multiple better than Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL)? The answer is eSports. And it’s the reason why you should pay attention to Activision stock.
You may have never heard of eSports, but your kids have. It’s a phenomenon where people pay to watch someone else play a video game, either going to an “arena” in an office park or watching the “action” on an internet TV stream.
It’s the hottest trend in entertainment, because it extracts big dollars from millennials who hate everything.
ATVI is in the middle of it.
In the modern age of gaming, Activision is best known for game series like Call of Duty and World of Warcraft. WOW is based on the Warcraft series, which is as old as the commercial internet. The series really got growing in 2004 when the Massively Multiplayer Online Role-Playing Game, a virtual world sold as a $15 per-month subscription, was released. The game has since been re-worked as a competitive eSports franchise, but the real excitement around ATVI stock today surrounds a new shooting game, Overwatch, which the company hopes to spin into another National Football League.
ATVI Stock and the Video Game NFL
The reason why Activision stock investors are salivating over Overwatch is the host of new ways eSports can cash-in on player interest … this has also earned CEO Bobby Kotick a massive new pay package.
Along with the up-front cost of the game, and the add-on packs, you now have all the revenue streams real sport offers: admission fees, TV rights, sponsorships, arenas, rights fees … the works. ATVI wants to build competitive Overwatch from the ground-up, hence the NFL analogy.
By building teams, tournaments and broadcast rights into the business model early, Activision gains an unprecedented level of control over every element of the resulting revenue streams. This is good news for ATVI stock.
Kotick calls Overwatch “the definitive eSport,” and believes it will gain the company a huge share of what Newzoo estimates will be a $1.1 billion market in three years.
ATVI hopes the game makes it a cash-flow monster. Operating cash flow has been booming at the company since the start of the year, going from $309 million in the first quarter to $456 million in the third quarter, allowing it to retire some of the debt it took on in 2013, after buying out its former majority owner, the French company Vivendi.
Bigger Gains, Bigger Risks for ATVI
The downside to all this for Activision stock is that bigger games with bigger revenue streams cost more to develop.
Video game makers are running out of analogies to describe their costs. Final Fantasy XV took 10 years to develop. A version of Call of Duty cost $200 million. The history of video game development is littered with failures, and controlling costs while gaining a result is as fraught in gaming as it is in Hollywood. Kotick is being paid like a Hollywood studio boss for good reason.
The difference with Overwatch is that Activision is trying to control the downstream profits, rather than becoming a cog in a distribution conglomerate, as is true for Hollywood. Instead of investing in development, or even distribution, Kotick is investing to control every downstream revenue source in a business where change is only going to accelerate.
That is called risk.
Bottom Line for Activision Stock
When you’re buying ATVI stock today, you’re buying into Kotick’s vision for the industry, in which games become sports, and the company controlling the intellectual property to a game becomes the commissioner of a global franchise. That’s one reason why eSports is so hot. It is global, a universal language, where many of the stars come from places like South Korea.
Where eSports lies on the hype cycle will determine your interest in getting in on Activision stock. Can a game like Overwatch retain player interest for 10 years and create a stable league and stars whose names kids memorize? Or is gaming, which has been transformed several times in the last decade, only going to go through several more transformations over the next decade that leave today’s eSports excitement looking like your Nintendo Wii U?
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL.
