Is Activision Blizzard Inc. Stock the Best Buy in Gaming?

Activision Blizzard announced it had closed its $5.9 billion deal for mobile gaming leader King Digital Entertainment on Feb. 23. The move was touted by pundits as a positive step to boost Activision's mobile gaming presence, and for good reason.

Mobile gaming revenue is expected to surpass PCs this year, accounting for $36.9 billion in sales, growing to $48 billion by 2020. The acquisition of King virtually ensured Activision would garner its fair share of mobile gamers, but since the deal closed so late in Q1, not much was expected this quarter. Thankfully, Activision had other ideas.

Just the facts

With King in the fold, Activision is now the largest game network in the world, boasting 544 million monthly active users (MAUs). That's a jaw-dropping number of gamers, but not surprising given Activision is home to two of the top five mobile games in the U.S.:Candy Crush Saga and Candy Crush Soda Saga,and the world's top-selling PC title, World of Warcraft.

Not only did Activision exceed its own and analysts' revenue and earnings-per-share (EPS) expectations last quarter, but it raised guidance for the balance of 2016. Activision had expected revenue of $1.26 billion this quarter, but posted sales of $1.46 billion and GAAP (including one-time items) EPS of $0.45, handily beating earlier projections of $0.21.

The impact of King was directly responsible for Activision's strong mobile gaming sales, easily its fastest-growing platform. In Q1, Activision's mobile and ancillary revenue segment -- which also includes merchandise sales -- nearly tripled to $243 million, up from 2015's $86 million.

The most impressive aspect of Activision's first quarter, even more so than its record-beating sales and increased 2016 guidance, was how quickly King made a positive impact to Q1. Of Activision's $908 million in segment revenue (the balance of $547 million is made up of deferred sales) $207 million was related to King.

With just over a month on the books, King's dominant mobile franchises accounted for 23% of Activision's total segment revenue. Just imagine what a full quarter of sales will do, let alone the balance of 2016. It's no wonder Activision boosted its annual revenue and EPS expectations for this year. Activision said it expects GAAP revenue of $6.13 billion in 2016 and EPS of $0.69. The current quarter's guidance of $1.43 billion is also impressive, given it would be a nearly 40% increase over 2015's Q2 sales of "just" $1.04 billion.

A bright future

Game developers in general are in an enviable position, as Activision's primary competitor Electronic Arts (NASDAQ: EA) demonstrated with its own recently announced blowout quarter. EA's stock is up a whopping 15% to start the May 11 trading day, thanks to trouncing revenue and earnings expectations.

Sales of EA's sports-related games and its Star Wars franchise were largely responsible for its better-than-expected quarter. EA said gamers spent a mind-boggling average of more than two hours a day saving the galaxy and battling universal bad guys. With Star Wars game enhancements and a sequel on the way, EA will likely keep its positive momentum going. As was the case with Activision's strong quarter, another key for EA was making inroads in its mobile gaming efforts.

Activision has a few aces up its sleeve to keep the EA's of the world at bay. One is fully integrating King into the fold. As Q1 demonstrated, the impact of King on Activision's mobile revenue is already substantial, and will become even more integral going forward.

Another driver of future growth is nearly as enticing as what King brings to Activision's table: revisiting in-app advertising. During Activision's recent conference call, King CEO Ricardo Zacconi said, "Advertising could be a meaningful revenue stream for King in the long term," though he added "it's still early." Any revenue derived from ads would be icing on what is already a pretty tasty cake.

In Q1, Activision also reported GAAP net revenue from its digital channels set a quarterly record of $926 million, up 59% year over year. Digital gaming sales now represent a Q1 record 64% of the company's total revenues, and is one more reason Activision tops the list of the best gaming stocks around.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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