How Activision Blizzard Crushed it in 2017

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Activision Blizzard (NASDAQ: ATVI) investors couldn't have asked for much more from their company in the past year. The video game developer gained over 70% in 2017, and that spike made it one of the top-performing stocks on the entire S&P 500.

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An investment doesn't usually rally like that unless the company shows big -- and enduring -- improvements to its sales and earnings outlook. So, let's take a look at the ways that Activision Blizzard surprised Wall Street with good news this past year.

Underpromising and overdelivering

CEO Bobby Kotick and his executive team beat their own growth targets in each of the four quarterly reports the company issued in 2017. That happy streak started in early February when Activision announced that operating income had more than doubled in the final quarter of 2016 as gamers made its latest Call of Duty title the No. 1 console game in North America for the eighth consecutive year. That report sent the stock higher by nearly 20% in a single trading day.

Activision was just getting warmed up, though. Better-than-expected first-quarter results, announced in May, were powered by a successful launch of Overwatch. That brand became the company's eighth billion-dollar franchise in 2017.

The next quarterly report, in August, showed just how far the developer has come since the days when just a few franchises -- mainly Call of Duty, World of Warcraft, and Skylanders -- dominated the business. Activision had no major game release during 2017's second quarter, but content updates across its wide portfolio drove higher audience and engagement figures and lifted profits by 20% to $1.3 billion.

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Activision's final quarterly report of the year came out in early November and, again, it outpaced expectations. The Blizzard side of the business set a record of 42 million active monthly users with help from growth in Overwatch and the free-to-play Hearthstone game. Meanwhile, a successful launch for Destiny 2 pushed the Activision studio segment to a record 49 million players. The King Digital side shed 21 million casual gamers, but the developer was able to extract more profit from the remaining, highly engaged users.

Building a stronger business

Activision's full-year forecast now calls for 2017 revenue to reach $6.75 billion while earnings stop at $2.08 per share. In contrast, its first prediction back in February had called for just $6 billion of sales and $1.70 per share of profits.

A string of popular content releases played a key role in that improving outlook, but so did the fact that gamers are enthusiastically embracing the digital sales channel. Full-game downloads are cutting out middleman retailers, leading to higher profit margins for Activision.

At the same time, content expansion packs and in-game micro-transactions are extending the useful life of each new title. While in the past the company generated a huge proportion of franchise sales in the first few weeks following a release, today titles frequently generate revenue months and sometimes a year or more following the launch.

That's good news for all video game publishers, but it implies an especially bright future for the industry leader, whose Call of Duty franchise just won the top spot on the console sales chart for the ninth consecutive year. Activision also took second place on the 2017 sales charts with its Destiny release, giving the company healthy momentum heading into 2018.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.