Part 5

Activision Blizzard Inc. (ATVI)

Company Background

Activision Blizzard, Inc. is an American video game holding company based in Santa Monica, California. The company was founded in July 2008 through the merger of Activision, Inc. (the publicly traded parent company of Activision Publishing) and Vivendi Games. The company is traded on the NASDAQ stock exchange under the ticker symbol ATVI, and since 2015 has been one of the stocks that make up the S&P 500. Activision Blizzard currently includes five business units: Activision Publishing, Blizzard Entertainment, King, Major League Gaming, and Activision Blizzard Studios.

Activision Blizzard, Inc. is a leading developer and publisher of console, online and mobile games with many big-name titles in their product portfolio. The company’s Call of Duty is one of the most popular gaming franchises globally. Its Overwatch League can be considered a pioneer of the esports concept.

The global public health crisis that we have all experienced so far this year and the fact that people have started spending more time at home has led to a substantial increase in the demand for the company’s products. This has further strengthened Activision Blizzard’s long-term growth prospects considering the fact that we believe that this process of digitalization, gamification and esports domination is expected to get even stronger in the coming years. The company has substantially benefited from the shift to digital download format. The company’s policy of updating games all the year round has also increased revenue visibility and stability.

The company has been active on the acquisition front as well acquiring King Digital in 2016, which fortified Activision’s footprint in the mobile genre. King’s Candy Crush was the top-grossing franchise in U.S. app stores during 2019. King operates as an independent unit. The segment generated revenues of $2.03 billion and accounted for 34% of revenues. Activision reported revenues of $6.49 billion in 2019. International revenues accounted for 48.5% of revenues.

The Santa Monica, CA-based company operates under three major segments and incorporates studio, media networks and distribution businesses under the “Others” segment.

Activision creates and publishes games for consoles, desktops, mobile and tablet. Franchises under this segment include Call of Duty, Crash and Spyro. The segment generated revenues of $2.22 billion and accounted for almost 37.2% of 2019 revenues.

Blizzard publishes games particularly for the PC format. It also maintains a proprietary online gaming service, Blizzard Battle.net, which facilitates digital distribution of Blizzard content and selected Activision content, online social connectivity, and the creation of user-generated content. The Overwatch League comes under this segment. The segment generated revenues of $1.72 billion and accounted for 28.8% of revenues.

The Other division includes Activision Blizzard Studios that makes original film and television content based on the company’s huge IP library. The segment also consists Activision Blizzard Distribution business.

The major competitors of Activision are Electronic Arts, Nintendo, Zynga and Tencent in the video gaming space.

Current Position – Financial Performance and Future Growth Prospects

Activision Blizzard had an absolutely stellar third-quarter 2020 earnings report, blowing all analysts’ expectations out of the water. Activision Blizzard’s third-quarter 2020 non-GAAP earnings of 88 cents per share jumped 66% year over year. Consolidated revenues surged 55.9% year over year to $1.72 billion. Adjusting for net effect from the recognition of deferred revenues and elimination of intersegment revenues, total revenues jumped 52.4% to $1.95 billion. For the quarter ended Sep 30, 2020, overall Monthly Active Users (MAUs) were 390 million compared with 316 million as of Sep 30, 2019. Activision Blizzard’s net bookings increased 45.6% year over year to $1.77 billion. Net bookings from digital channels were $1.61 billion, up 65.1% year over year. Notably, in-game net bookings were $1.20 billion, up 76.6% year over year.

Product sales (20.9% of revenues) were $408 million, up 56.9% year over year. Subscription, licensing and other revenues (79.1% of revenues) increased 51.3% to $1.55 billion.

Based on distribution channels, Activision Blizzard reported retail-channel sales of $117 million, up 25.8% year over year. Moreover, digital online revenues of $1.75 billion were up 72.9% from the year-ago quarter. However, other revenues declined 52% year over year to $84 million.

Further, on the basis of platforms, revenues from mobile and ancillary (33.8% of revenues) rose 25.9% year over year to $661 million. Additionally, PC revenues (26.3% of revenues) jumped 50.7% year over year to $514 million. Moreover, revenues from console (35.6% of revenues) surged 188.4% year over year to $695 million.

Activision popularity is primarily driven by its well-known franchises, which will continue to fuel top-line growth. Call of Duty is one of the biggest growth drivers for the company. The game has been the top-selling console franchise for Activision in 10 of the last 11 years. The latest title, Call of Duty: Modern Warfare has sold more units than Call of Duty: Black Ops 4. Activision stated that it will make frequent content updates to Call of Duty and expand the franchise’s presence across platforms and geographies. Call of Duty: Warzone was launched on Mar 10, 2020 and the update has attracted more than 75 million players to date. Call of Duty Mobile, launched in October 2019, continues to play an important part in driving user base. The success of World of Warcraft Classic also indicates an expanding portfolio, which will benefit the company’s top line in the long haul.

Compared with the physical platform, digital games are more profitable due to minimum packaging cost. This cost effectiveness will help publishers to use the digital format to keep a popular franchise running profitably over a longer period of time. Notably, Digital revenues contributed 76% of total revenues in 2019. Additionally, Activision has been trying to adopt an all year-round model instead of a launch-based model in which majority earnings and profits are derived in the first week to boost engagement. This bodes well for long-term performance.

Technical analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the period March-August taking the price from the March 17th lows of around $51 to the $87 all-time highs in the beginning of August. Since then, we have seen a very common trend continuation pattern consisting of an initial strong volatile correction, which is then followed by a sideways price action with a slight downward corrective bias. This creates a diagonal downward sloping resistance line following the corrective movement, which if broken to the upside signals the resumption of the long-term trend. Once again this famous chart pattern proved to be accurate in the prediction of the next big move in the market as the $80 resistance was broken to the upside in the beginning of December. What followed was an incredible and rapid rise of the stock all the way up to the $93 mark, thus recording a new all-time high reading. The stock is currently sitting at the $89 mark after being initially rejected by the $93 highs. However, we believe that this is provoked by nothing else but a short-term profit taking interest in the market. The prior all-time highs back from the August bull-run are providing immediate support around the $88 level. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the transition of power in the White House, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming weeks, which in turn could affect a lot of the stocks negatively, we see that the winners will most likely continue to win. We remain bullish on the ATVI stock and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from extreme overbought conditions are currently trying to build up some momentum for another push higher, which means that the uptrend might be resuming very soon.

The daily chart shows that the price is currently testing the first key horizontal support line at $88, which is actually further supported by the strong dynamic 20 DMA support sitting at $89. Considering the fact that new all-time highs were set recently we should see the price staying above the prior ATH and treat it as a support in order for the strong rally to continue. Furthermore, we have the critical 50 DMA and 100 DMA currently lying at the $83 and $85 marks, which will definitely provide remarkable technical support for the price in case $89 gives away. We expect lots of buying pressure to occur around the above-mentioned support levels, which in turn will end up sending the price back to the all-time highs around $93.

We will start buying ATVI at $89, just above the major support at $88 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $82. Our first take profit target is at $103, followed by the next target at $112 where we will be fully closing our positions and collecting the profits.

McDonalds’s Corp. (MCD)

Company Background

Well, this section is going to be pretty easy as I don’t believe that there is a person on Earth who doesn’t know what McDonalds does. It’s arguably the world’s most recognizable chain of restaurants, with over 39,000 locations worldwide found in more than 100 countries. McDonalds is famous for its golden arches, which aim to remind consumers they can enjoy a familiar, comforting meal almost anytime and anywhere they want. The company has definitely evolved over the years, but its main accent remains on the unique feeling of sameness that it brings to its customers. This has been a major driver for the remarkable success of the brand on a global scale. Have you ever heard of a McDonalds restaurant going bankrupt..? Well, neither have we! Customers like the fact that eating at a McDonald’s sometimes can play the role of a time machine as it brings that sentimental partial nod to the past. Furthermore, while we all know that MCD is definitely far from healthy the value you get for your money is definitely not to be underestimated, and most importantly we all know how good it tastes, right? This foundation is a big reason why long term value investors can easily anticipate more growth from the restaurant chain in the future. Last but not least, the 2020 COVID-19 pandemic has definitely hurt all companies in the restaurant and retail sector, as most of them had to shut doors for the larger part of the year, including McDonalds. However, MCD’s drive thru is still working and in an environment where you can’t basically eat outside people have continued to choose MCD as one of their regular and go-to restaurants when they are outside. What many fail to understand is that MCD’s customers have been using the drive thru regularly for decades and in the current abnormal environment that we are living in, people feel a sense of normality when they stop by at the drive thru of McDonalds for a Big Mac. However, even with the increased drive thru traffic, it still remains a challenge for the company to offset the missed revenue from all of the closed restaurants globally.

Current Position – Financial Performance and Future Growth Prospects

McDonald’s reported third-quarter 2020 results, wherein both earnings and revenues surpassed the street’s estimate. The bottom line also beat the consensus estimate after missing the same in the trailing two quarters.

Robust drive-thru presence and its investments in delivery and digital over the past few years have aided the company amid the ongoing crisis. All of the company’s restaurants remain opened throughout the quarter under review. However, resurgence in coronavirus cases has resulted in limited dine-in capacity and operating hours in most of the countries.

The company reported adjusted earnings of $2.22 per share, which beat the consensus estimate of $1.93. Moreover, the bottom line improved 5% year over year. Meanwhile, foreign currency translation had a negative impact of 3 cents per share on earnings in the quarter under review.

In the third quarter, revenues of $5,418.1 million surpassed the consensus estimates of $5,365 million. However, the figure declined 2% year over year. This downtrend can primarily be attributed to the coronavirus pandemic. Moreover, on a constant-currency basis, the top line decreased 2% year over year.

At company-operated restaurants, revenues were $2,286.4 million, down 5% year over year. Moreover, the same at franchise-operated restaurants inched up 1% to $3,044.8 million.

In the quarter global comps declined 2.2%, against growth of 5.9% in the prior-year quarter. Comps declined for the third straight quarter after reporting positive comps in the trailing 19 quarters. In second-quarter 2020, comps were down 23.9%.

Last Fall, the senior management of the company decided to do a special promotion for its $6 combo together with the famous hip hop artist Travis Scott. You may not know who the relatively new musician and entertainer is, but younger fans of pop and rap music do. His star power was enlisted to help McDonald’s sell more combos in September. The promotion was so successful that the company struggled to fully meet demand. McDonald’s eventually reported that September’s sales marked the best single month in almost a decade.

One good month or one savvy promotion doesn’t inherently make a company a winner. The fact that McDonald’s was able to act as well as it did when it did is a microcosm of its entire operation, though. Not every idea is a winner, but the ones that are end up being very big deals. This reality is evident in the numbers. Earnings aren’t growing in a perfectly straight line, but they are growing pretty consistently, and are expected to keep growing from here.

As for the revenues, yes, they have been shrinking, but that’s by company design. The organization has been reducing its ownership of restaurants by selling them to franchisees. As of September, 36,438 of the world’s 39,096 locations were franchise properties, up from 29,851 of the 36,405 McDonald’s locales five years ago. The move ultimately means lower sales but potentially more profits since franchisees’ fees and royalties are higher-margin revenue. This transition is largely complete now, translating into sales and earnings growth going forward.

Technical analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the period March-October taking the price from the March 17th lows of around $124 to the $231 all-time highs in the late October. Since then, we have seen a very common trend continuation pattern consisting of an initial strong volatile correction, which is then followed by a sideways price action with a slight downward corrective bias. This creates a diagonal downward sloping resistance line following the corrective movement, which if broken to the upside signals the resumption of the long-term trend. Once again this famous chart pattern is highly accurate in the prediction of the next big move in the market. If the strong diagonal resistance line currently lying at around $214 gets broken, then the price would make another impulsive move higher. What could follow is an incredible and rapid rise of the stock all the way up to the $245 mark, thus setting a new all-time high. The stock is currently sitting at the $209 mark after being initially rejected by the above mentioned resistance and also by the 50 DMA and 100 DMA, which are also currently positioned around these levels. Our analysis shows that the stock will most likely move within the current downward channel, thus approaching the $200 level. That is where we expect to see substantial buying interest, which will then lead to an uptrend continuation. However, we believe that this is provoked by nothing else but a short-term profit taking interest in the market. The prior all-time highs back from the October bull-run are providing immediate resistance around the $231 level. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the transition of power in the White House, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming weeks, which in turn could affect a lot of the stocks negatively, we see that the winners will most likely continue to win. We remain bullish on the MCD stock and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from extreme overbought conditions are currently trying to build up some momentum for another push higher, which means that the uptrend might be resuming very soon.

The daily chart shows that the price is about to test the first key horizontal support line at $206. Considering the fact that new all-time highs were set recently we should remember that this is a stock that has recently attracted a lot of investors interest and that after a short correction this interest could be coming back very quickly. However, we have the critical 50 DMA and 100 DMA currently lying at the $213 and $217 marks, which definitely puts some selling pressure on the stock as millions of traders are using these indicators. In conclusion, the current technical and fundamental picture with McDonalds doesn’t worry us at all as we expect lots of buying pressure to occur around the $200 levels, which in turn will end up sending the price back through the all-time highs around $231.

We will start buying MCD at $203, just above the major support at $200 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $192. Our first take profit target is at $250, followed by the next target at $265 where we will be fully closing our positions and collecting the profits.

Sincerely,

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