Activision (ATVI) and EA (EA) to Benefit from Shift to 'Engagement Monetization', Says Morgan Stanley; Analyst Initiates Coverage on ATVI and EA With 'Overweight' Ratings

September 23, 2016 7:33 AM EDT
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(Updated - September 23, 2016 9:43 AM EDT)

Morgan Stanley initiated coverage on Activision Blizzard (NASDAQ: ATVI) with an Overweight rating and a price target of $56. Electronic Arts (NASDAQ: EA) was initiated at Overweight with a price target of $101. Analsyt Brian Nowak anticipates a continued shift away from units sold to a model based on users, engagement, and digital monetization, and he thinks both companies will benefit.

"We are bullish on the digital gaming shift as gaming evolves from a 'units sold' business into an 'engagement monetization' business. 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," said Nowak.

The analyst continued, "We expect solid new game sales and a focus on new digital content – expansions, new challenges, new characters, etc. – to drive 11%/5% 3 year-CAGR monthly active user (MAU) growth for ATVI/EA. We see this MAU growth combined with rising in-game digital purchase penetration – reaching 20%-30% of gamers by 2020 (from 12%-25% now) – leading to 16%/15% CAGR in-game digital rev growth for ATVI/EA. Our digital payer adoption curves may prove conservative given recent adoption trends."

Discussing margins opportunity, the analyst said, "We see total digital rev – in-game purchases + full game downloads – driving all of ATVI/EA forward rev growth. The high-margin digital shift is favorable to margins too, as it gives ATVI/EA more gross profit dollars to invest, while also delivering higher profitability. Digital has also brought increased investment discipline – focusing on fewer (hopefully hit) franchises, extending games' lifespans, etc. In all, we see op margins heading ~650 bp higher between now and '18 for both names."

Morgan Stanley's base case for Activision Blizzard is for 5-year CAGRs of 11% and 17% for revenue and EPS. Its base case assumes EA continues to benefit from the shift to digital, some success with FIFA mobile and mobile advertising. The base case sees margin expansion of ~800 bps in the next five years and EA sustains 5-year CAGRs of 6% and 14% for revenue and EPS.

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 $44.51 yesterday.

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