Can Activision Join the Big Leagues?
Recently, Activision Blizzard, Inc. (NASDAQ:ATVI) launched the expansion of its popular video game Overwatch to include professional sports with the inaugural season to kick off during the second half of 2017. While the company’s goal of rising to the size of the NFL or ESPN may be a long way off, analyst Timothy O’Shea at Jefferies pointed to recent investments by Robert Kraft (Owner of England Patriots) and Jeff Wilpon (Owner of the New York Mets) to indicate that things are heating up. O’Shea reminds critics “Bob Kraft likened his investment as being similar to his Major League Soccer team, which took 5 years to become profitable.”
The analyst also noted that the new Overwatch football league has already sold 7 city-based teams for $140 million each and “none of this was in our forecast.” Moreover, the analyst discussed revenue implications of ATVI via potential sales of the other 21 teams, stating: “Assuming ATVI sold all 28 teams for $20MM, this implies ATVI would generate $560MM of revenue.” However, even assuming that the company only maintains its initial seven teams, O’Shea is predicting a 0.4% to 1% upside to his revenue projection of $6.5 billion for 2017.
Activision did raise eyebrows by selling one of the initial seven teams to NetEase, a leading Chinese-based technology distributor. Due to previous business relationships between the two companies, there are concerns of potential conflict of interest, transparency, and fairness. With that said, the analyst viewed the acquisition in a positive light, writing that the sale could spark a move from AVI’s traditional full-price sales model to Chinas popular free-to-play model. According to O’Shea, this new model would lead to meaningful audience expansion, drive more in-game spending and attract even more advertisers and sponsors. ATVI has already garnered a large and passionate fan base, as proven through the release of its 25th hero named Doomfist, which last week generated 7.5 million views on YouTube within just 5 days.
As Newzoo, a leading provider of stats on global games, and eSports predict a $1.5 billion market opportunity by 2018, the analyst’s view remains optimistic. O’Shea maintains ATVI stock as a Buy with a $68 price target, representing a 12% upside from where the stock is currently trading. (To watch O’Shea’s track record, click here.)
TipRanks analytics indicate ATVI as a Strong Buy. Out of 11 analysts polled by TipRanks in the last 3 months, 10 are bullish on Activision stock, while 1 is neutral. The consensus target price stands at $62.95, revealing a 4% upside from current levels.
Original Content Is Key to Netflix Global Expansion
Netflix, Inc. (NASDAQ:NFLX) ratings on Metacritic (a website that aggregates reviews of media products) on original content are running high at an average of 74/100 with shows like Sense8, Master of None, Unbreakable Kimmy Schmidt, House of Cards, and Orange is the New Black is taking viewers by storm. Also, new debuts such as Louis C.K. and Dear White People are doing even better soaring with an average of 83.5/100 on the metric rating scale. According to analyst Kip Paulson at Cantor Fitzgerald, the creation of strong and original content “should continue to build given management’s target of 1,000+ hours of original content in 2017 vs. 600+ hours in 2016.”
Furthermore, Paulson views the shift of TV viewers from the traditional television set to the internet as a factor in his projected 2Q17 revenue of $2,755.1 million, marking a 30% year-over-year growth. Yet, the analyst’s forecast is slightly conservative compared to FactSet’s estimate of $2,764 million. The analyst views 1Q as an indication of where things are headed, writing: “We are modeling 2.62M int’l net adds (to 50.515 ending subs, +40% Y/Y) and 599K domestic net adds (to 51.453M ending subs, +9% Y/Y), virtually in line with management’s guidance of 2.6M and 600K net ads, respectively. Our worldwide ending streaming sub estimate is 101.968M.” In other words, while domestic sales fell just short of management target levels, international sales exceeded expectations, and that is the real story here.
Paulson expects, “U.S. subscriber growth to attenuate from high single-digits to mid-single-digits over the next few years as NFLX nears 50% penetration of BB HHs (broadband households) in the U.S. However, international penetration of BB HHs remains less than 6%, suggesting that NFLX has both high-growth potential (high-teens CAGR) and a long runway in int’l markets.” By looking at Netflix’s current profit and loss content spend, which stands at $6 billion+ and its cash spend of $8 billion+, Paulson believes we can take this as a positive sign that will lead to “gradually higher operating/EBITDA margins.”
As such, the analyst reiterates an Overweight rating on NFLX with a $190 price target representing a 20% upside from where the stock is currently trading. (To watch Paulson’s track record click here).
TipRanks analytics indicate NFLX as a Buy. Out of 28 analysts polled by TipRanks in the last 3 months, 18 are bullish on Netflix stock, 9 are neutral, while 1 is bearish. The consensus target price stands at $167.19, revealing a near 6% upside from current levels.