Is FinTech a gaming?
Is FinTech a gaming?
Will the video game sector be the newest area for FinTech’s growth in 2023 and beyond?
Let’s take a look at gaming giant Activision!
The company was founded in July 2008 through the merger of Activision, Inc. and Vivendi Games. It joined the S&P 500 in 2015 and has remained since and is only one of only two companies on the list related to gaming, alongside Electronic Arts.
They are currently ranked on the Fortune 500 list at rank #373. They are known for producing mobile games as well as games on consoles such as the Xbox or PlayStation. Furthermore, they also create esports tournaments all over the world for many of their franchise games. In addition, they sell merchandise related to these franchises but also make money off advertising, especially through their mobile phone games. They are the largest game company in the Americas and Europe in terms of revenue and market capitalization.
Activision’s most known franchises include Call of Duty, Candy Crush, and World of Warcraft.
When analyzing the balance sheet of Activision over the past 3 years the first thing that catches one’s eye is the cash and cash equivalents for the company and how much they have increased over the past three years. They have more than doubled in three years and the average growth
over the three years is about 8% PER QUARTER. The company was already receiving massive growth before Covid-19 due to the rise in the use of technology throughout the world. Covid 19 helped further propel this as more people were working from home and the demand for technology as a whole expanded. It also left people with a lot more free time saved from things such as no longer having to commute to work. As a result, people had more free time to do other things such as play video games. This increase in player base across the board helped drive an even larger revenue growth that may have slowed down otherwise. It is also important to understand that Activision runs in a high cash flow environment.
When video games and in game content are purchased almost none of that is made on an A/R basis. As a result, they keep a very low A/R balance and a very high cash balance.
Activision maintains a high Current Ratio sitting at 5.6 for its most recent quarter which is up from 2.3 from three years ago. With such a high cash balance Activision maintains a very high quick ratio sitting currently at 5.1 and high cash ratio sitting at 4.8. This is very good because if the company were ever to run into trouble in the short term they would be fine. Another important thing to keep in mind with Activision is how large their Goodwill is on the balance Sheet. This is because the company is constantly acquiring smaller development and production studies to add to their ever-expanding company. When it comes to the liability side of things the most noticeable growth was with Retained Earnings due to the massive increase in net income over the years.
When analyzing the income statement, net revenues were on a small decline until 2020 when Covid-19 hit and after that only increased. As a result, the average growth per quarter of the past three years was 1.85% whereas total costs and expenses only grew at a rate of 0.65% per
quarter for the past three years.
Operating income was able to grow as a direct result and averaged a growth rate of 4.9% per quarter over the past three years. Gross Margins over three years were able to go from 66% to 73%. Taxes grew at an average rate of 39% per quarter which may seem very high compared to the other categories however did not have a very large impact as it was a much smaller number compared to the companies EBIT. The combination of all these factors resulted in Activision’s net income over the past three years to average a growth of 3.7% per quarter.
When analyzing the DuPont ratios, Net Profit Margins for Activision stands out as a clear winner and went from 25% to 35% in the past three years.
NASDAQ: ATVI – Profit Margins
Gross Margin Net Profit Margin
66% 67% 67% 67% 68% 68% 70% 73% 72% 73% 73% 73% 70%
34% 34% 34% 35% 35%
25% 27% 26% 27% 25% 26%30%
Q4-CY18 Q2-CY19 Q4-CY19 Q2-CY20 Q4-CY20 Q2-CY21
The strongest correlation behind that being that as gross margin increased for Activision so did their net profit margins. However, when analyzing their Asset Turnover ratio Activision averaged a 0.37 over each quarter over the past three years.
They also had an average equity multiplier of 1.5 over the past three years for each quarter. Combining these three ratios gave the company an average DuPont Ratio of 0.16 over the past three years. Although this may not seem very good, it is good for a market that is very competitive. They are doing a good job at maintaining their inflows in the short term.
Electronic Arts, the other powerhouse gaming company, maintained a DuPont Ratio of 0.19. The gaming industry is very competitive which is why you also see so many acquisitions by these two companies. It allows them an easier time staying at the top because there are less up and coming development companies to compete against. The more acquisitions the more possibility of having one of their studios produce the next big game.
When analyzing the company’s EPS over 3 years it was initially going down. But then once Covid-19 hit started to turn around and go back up. And ended up averaging an increase of 9% each quarter for the past three years.
When looking at the Balance Sheet and Income statement as a whole they both show the same trends with a slow in growth of revenues and net income. The company still continued to grow slowly which as a big company can tend to be hard.
However, with the rise of Covid-19 and the explosion of working from home and at home computer setups the growth exploded during the past year and a half. Covid-19 has helped them expand their market growth. And as a result has nearly doubled their cash and cash equivalents while propelling their net income forward.
Analysis of Manager’s Comments
The manager’s comments tend to agree with the analysis of their numbers. They talk about the Covid-19 pandemic and how it has helped them in terms of sales because of a large increase in demand for their products. This matches up directly with the numbers presented. They also discuss the competitive market that they are a part of and that there is a large increase of competition for talent. As a result, they need to consistently be competitive in the job market and look at acquiring smaller development studios. This is part of the reason they have such a high goodwill.
Lastly, they talk about how they project sales to keep moving forward but hesitate to predict too far into the future due to the highly competitive market. They know that their future profits depend on the future releases of their games. This matches up with the numbers, in the short run they are doing very well but in the long term it will really depend on how well their franchise games go as well as new games. It is hard to see just how well they will do in the long run.
ATVI at the end of 2018 dipped massively due to expected dips in revenue as a result of no new franchise or blockbuster games being expected to release in 2019.
After that dip however they trended back upwards until more recently when they started to dip back down as a result of internal investigations. Activision got sued by the California Department of Fair Employment and Housing and also two of their executives resigned. Compared to the S&P 500, ATVI in 2019 had way less growth and was trending down. Until about the start of COVID in which it started to trend up on almost the exact same line as the S&P 500. However, once the company started getting investigated in about May of this year the stock price has been trending downward. It will most likely continue to trend downward for the rest of the year.
Future of the company and Investment
To summarize, in the short term this company is doing very well in terms of sales and revenues. It is very strong with a lot of development under its belt and multiple successful franchise games. However, in the long term this is where the certainty becomes unclear.
Since it is such a competitive market it is tough to stay at the top unless you are consistently able to deliver successful games and retain your franchise games. The company is currently going through a rough patch with the internal investigations but in my opinion, I think this is a good thing for the company.
It will result in better executive and management teams and further drive and develop the company to a better stable place. I would invest in this company because they are only one of two companies that have been able to consistently be successful in the gaming industry (an industry that is only set to grow bigger as technology develops) and are consistently able to release franchise games which are so important. I would look to buy in now especially since the stock price is so low due to recent news.