This global gaming stock is headed higher (and it isn't GameStop)

The video game industry has been a major beneficiary of the COVID-19 lock-down mandates, with revenue growth rates nearly double the normalised levels in 2020. Activision (ATVI) is one of the biggest beneficiaries thanks to top content titles, innovation and superior execution. The overwhelming success of free to play game ‘Warzone’ drastically increases the player base and acts as a funnel to monetisation as players convert to the paid premium versions. ATVI boasts more than 400 million players globally and over 100 million players in each key region.

Next week brings a spectacular event in the video gaming world, with the opening weekend of the Call of Duty League on 11 February through to the week of 1 March. Last year's event concluded with the Champs' Weekend, breaking records for the highest viewership of any Call of Duty e-sports event. We think this year's event will be even bigger as global lock-downs continue and viewership and betting on e-sports are already growing at impressive growth rates.

We invested in ATVI in September 2020 at around US$78, leading up to the release of Call of Duty: Black Ops Cold War in December 2020 because initial online hype was strong and early pre-order data was tracking better than the previous and wildly successful COD, Modern Warfare 4. But most of all, we thought COD Cold War had the potential for a record release given the 75 million active Warzone users who will funnel through and convert to the paid installer base. Cold War was a success, so much that for the first time ATVI had to change the reporting metrics to account for the surge in online purchases vs the traditional physical box set.

Looking ahead, the 2021-2022 pipeline is strong and audience reach can more than double from here with planned releases for Overwatch 2 (2021) and Diablo 4 (2022), both gathering a lot of attention. By shifting development resources to pursue launching new releases simultaneously on all platforms (Mobile/PC/Consol/FreeOnline) will significantly increase ATVIs overall audience and engagement across all geographies from the current 400 million users to more than 1 billion users.

We see multiple catalysts on the horizon: 

(1) New IP hits. Activision is in hiring mode given the strong demand of gamers in 2020. In May, the CEO said the company would need to hire 2,000 workers in production and development over the next 12 months. As of September, the company has hired more than 800 new developers, which is enough to produce three new games if it wanted to. 

 (2) COD Mobile launch in China unlocks a US$30 billion market. COD Mobile in China has not yet been incorporated into the company's guidance, but it will further expand the game user base and monetisation (MS estimates +23c -92c addition to 21EPS). 

 (3) e-sports: Monthly viewership of e-sports competitions is expected to reach 35 million, growing 15% year-on-year, according to a July 2020 study by eMarketer. ATVI benefits the most from accelerating esports viewing because it owns two of the largest esports leagues. E-sports betting attracted 20-times more customers versus pre-pandemic levels, and 40% of esports betters had never placed a bet on esports before (source: Odds Matrix). And ATVI stands to benefit greatly by sharing the revenue pool.

While we are satisfied with our more than 16% return so far on ATVI, we think it can reach US$120 per share in 2021, or 30% upside given the consumer backdrop and long list of catalysts ahead.

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