Activision Blizzard, EA To Drive Industry's Shift Toward A New Digital Model

Activision Blizzard, Inc. ATVI and Electronic Arts Inc. EA would likely drive “the industry's digital shift away from "units sold" to a model based on users, engagement, and digital monetization,” Morgan Stanley’s Brian Nowak said in a report. He initiated coverage of both companies with Overweight ratings.

Shift From Units-Sold To Engagement-Monetization

“We see digital in-game offerings leading to recurring and growing user bases, higher per-game engagement (time spent per user), and more monetization opportunities,” analyst Nowak wrote. He added that new game sales are expected to be robust and the focus is likely to be on new digital content.

This would lead to a 3-year monthly active user [MAU] CAGR of 11 percent for Activision Blizzard and of 5 percent for Electronic Arts. This MAU growth would be combined with increasing in-game digital purchase penetration, resulting in an in-game digital revenue CAGR of 16 percent for Activision Blizzard and of 15 percent for Electronic Arts, Nowak mentioned.

Margin Expansion

The digital shift is accompanied by higher margins, offering Activision Blizzard and Electronic Arts higher delivery as well as more funds available to invest. The analyst added, “Digital has also brought increased investment discipline – focusing on fewer (hopefully hit) franchises, extending games' lifespans, etc.”

Activision Blizzard

King's strong metrics would enable Activision Blizzard to build a significant ad business. Nowak expects King to generate ~$500 million in revenues and contribute 14 percent of adj. EPS by 2018. The price target for the company is at $56.

Electronic Arts

The company’s mobile ad opportunity is expected to add ~$150 million in revenue and contribute 5 percent of adj. EPS in FY18. “We are also bullish on EA's FIFA mobile opportunity, as our analysis shows that even if FIFA mobile were to monetize at half the rate of Madden Mobile, it would add 6% to FY18 EPS,” the analyst commented. The price target for Electronic Arts is at $101.

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