Video game publishing giant Activision Blizzard (ATVI) has been in the news a lot lately, and not for good reason. Down more than 25% from its highs, it's likely difficult for investors to see the entire picture. Let's take a look at both sides of the coin and what the current situation implies for shareholders over the long term.
The bad
Before discussing any of the high notes about Activision Blizzard, it's probably best to clarify the controversy surrounding the company.
Image source: Getty Images.
On July 21, a lawsuit was filed against Activision Blizzard by California's Department of Fair Employment and Housing. The lawsuit cited several issues primarily centered around the company's gender discrimination in the workplace.
Activision Blizzard's initial response to the lawsuit sparked outrage from many of its employees and even led to a walkout on July 28. To help quell employee distress, CEO Bobby Kotick wrote a letter to all employees citing five different immediate changes that the company was instituting. But the problems didn't stop there.
On Sept. 21, Activision Blizzard notified investors that the United States Securities and Exchange Commission (SEC) launched an investigation into the company's "disclosures on employment matters and related issues." Following the reveal of the investigation, Blizzard Entertainment's chief legal officer Claire Hart decided to step down.
This barrage of bad news has sent Activision Blizzard's stock into a downward spiral over recent months -- down roughly 17% since July 21. To add fuel to the already burning fire, the gaming sector as a whole has seen lackluster performance across the board lately. Publishing peers like Electronic Arts (EA -1.03%) and Take-Two Interactive (TTWO 0.69%) are both down more than 10% over the last two months.
The good
While it's hard to see many bright spots amid what looks like an ongoing company crisis, Activision Blizzard's core business is actually performing quite well.
After reviving its Call of Duty (COD) franchise through various iterations across different game modes such as free-to-play and mobile, the company is experiencing some sustained success. The entire COD franchise recorded 127 million monthly active users in the most recent quarter, which is three times larger than the same period two years prior.
In fact, according to research firm NPD Group, COD is home to the best-selling video game year to date, despite not having released a single new title since last year. Activision also just announced that it will be launching its newest game version, Call of Duty: Vanguard on Nov. 5, which should top the charts once again.
But it isn't just the COD franchise that's driving positive results for the company. Activision Blizzard's mobile-focused studio, King Games, is putting up stellar numbers as well thanks largely to its hit app Candy Crush. In the last quarter, the studio accounted for 34% of overall revenue and generated $248 million in operating income.
Over the last 12 months, among all three of the company's studios, Activision Blizzard has generated $8.9 billion in revenue and roughly $2.5 billion in free cash flow. With more than $6 billion in net cash on its balance sheet, Activision's current price-to-free cash flow multiple of just over 20 times looks quite attractive at first glance.
What does the situation mean for shareholders?
The lawsuits and controversy surrounding Activision Blizzard's workplace environment are almost certain to have negative repercussions. Not only financially through potential fines or expensive legal bills, but also in the company's ability to attract talent. In the first-quarter conference call of 2021, Kotick stated that, "Through the end of next year, we intend to hire more than 2,000 developers." While those plans may still be intact, a stained workplace reputation might make that process more difficult than initially anticipated.
However, as the results from the recent months have demonstrated -- Call of Duty was the third-best-selling video game in August -- gamers' habits don't seem to be changing even amid the controversy. Though it's difficult to know what sort of ramifications will result from the company's internal issues, for the time being, they don't appear to be compromising the value of Activision Blizzard's intellectual property.
Understandably for many investors, workplace trouble like this is an automatic deal-breaker. But if the company is able to take concrete steps to improve its culture and move past this, investors could reap big rewards. Activision Blizzard operates in a massive and growing industry with highly valuable franchises and trades at a reasonable price. Those factors tend to bode well for good returns.
