Activision Reports Weak Q2 Earnings; Strong Launch for Diablo Immortal Despite Microtransactions Blowback

Activision Stock at a Glance

• Current Morningstar Fair Value Estimate: $92
• Activision Stock Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Activision Earnings Update

Activision Blizzard (ATVI) posted another weak quarter with GAAP revenue down 28% due to the continued knock-on effect of weak sales and user retention of Call of Duty: Vanguard versus the 2020 installment. Due to the pending acquisition by Microsoft, management is foregoing earnings calls.

We Expect Activision Merger to be Approved

We still believe that the merger will be approved, though the closing will likely not occur until the first half of 2023. We are maintaining our fair value estimate of $92, which balances our standalone valuation (also at $92), the acquisition value of $95 a share roughly a year from now, and the potential for regulatory intervention.

Activision Margins Fall

Total non-GAAP revenue for the quarter fell by 15% year over year to $1.6 billion as the ongoing growth at King could not offset the drop at Activision and Blizzard. Non-GAAP operating margin for the quarter fell to 28% from 31%, due to the lower revenue, slightly higher sales and marketing expense, and continued investment in development.

Blizzard Bookings Drop

Blizzard bookings dropped by 29% to $375 million as the group continues to battle a tough comparison due to the timing of World of Warcraft expansions. The release of the Dragonflight expansion in September should help bookings bounce back in the second half. The firm announced that development on Diablo IV and Overwatch 2 remained on track, with Diablo planned to launch in 2023 and the later title set to launch in October. The long-delayed release of Diablo Immortal occurred on June 2 on mobile and PC. While the gameplay was relatively well-received, many reviewers and players lambasted the amount and cost of the microtransactions in the game. Despite the blowback, DI reached the top of the game download charts in over 100 countries and reportedly grossed over $100 million in its first two months. The positive start in terms of bookings could wither away if the need for and amount of microtransactions become overly onerous in later-stage gameplay.