Mizuho Keeps Buy Rating After Activision's (ATVI) Rare Miss

Mizuho analyst, Neil Doshi, cut his price target after Activision (NASDAQ: ATVI) had a rare quarterly miss. The PT comes down significantly but the analyst keeps his Buy rating since a good part of the reduction came from title push out and the acquisition with the companies businesses cash generation ability intact.

The last time ATVI missed was in 2011 but the analyst is sticking with his Buy rating for the following reasons:

1) Nothing structural has changed - Skylanders and GH underperformed and Destiny got pushed out

2) We still see upside in 2016 and expect strong sales from CoD, Overwatch, and WoW to drive upside

3) We expect more cost and rev synergies from King to be announced.

ATVI missed 4Q revenue expectations by reporting non-GAAP revenue of $2.12b versus consensus estimates of $2.15b due to FX and weaker-than-expected sales of Skylanders and Guitar Hero. However, 4Q non-GAAP EPS of $0.83 beat consensus of $0.82.

For 1Q, the company guided to rev of $800m and EPS of $0.11, versus consensus of $800m/ $0.19 - the guide includes one month of King's contribution. For '16, ATVI guided to rev/EPS of $6.25b/$1.75, below the Street's PF est of $6.47b/$2.06. The shortfall is due to the major Destiny game pushed out to '17 ($0.15 impact), moving King employees from stock to cash comp ($0.06), and weaker Skylanders/FX/conservatism (~$0.10).

Positives:

1) Call of Duty was up double-digits YoY and LTD CoD sales have generated $15b in revenue - more than Star Wars + Marvel + Harry Potter + Batman + LOTR movies combined

2) Highest level of engagement with 80m MAUs, up 25% YoY

3) 2015 Digital revenue of $2.6b accounted for 57% of total revenue (exceeding retail for the first time)

4) Board approved a 13% dividend increase to $0.26/share

Concerns:

1) Destiny will be pushed out by a year

2) Skylanders & Guitar Hero faced stiff competition from Infinity & Legos

3) King could add a greater degree of risk due to the challenging nature of casual mobile gaming

4) We have yet to see material margin expansion.

2016 EPS goes from $1.52 to $1.77 to account for the King acquisition however PT multiples come in to account for the potential variability that goes with casual mobile gaming companies. The new PT is $35, down from $42.

For an analyst ratings summary and ratings history on Activision Blizzard click here. For more ratings news on Activision Blizzard click here.

Shares of Activision Blizzard closed at $30.52 yesterday.

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