Activision Blizzard, Inc.

Transcription

1 UNIVERSITY OF OREGON INVESTMENT GROUP 12/04/2009 Technology Activision Blizzard, Inc. RECOMMENDATION: HOLD Stock Data Price (52 weeks) $ $13.14 Symbol/Exchange ATVI / NASDAQ Beta (Regression) Shares Outstanding 1,271,000,000 Average daily volume 16,067,500 (3 month average) Current market cap 14,476,690,000 Current Price Dividend Dividend Yield $11.39 N/A N/A Valuation (per share) DCF Analysis $15.25 Comparables Analysis Target Price Current Price $4.74 $12.10 $11.39 Summary Financials Revenue Net Income 2008A $3,026,000,000 -$107,000,000 Covering Analyst: Sean Golin sgolin@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.

2 BUSINESS OVERVIEW Activision Blizzard, Inc. is located in Santa Monica, CA. They are responsible for creating and publishing video games and accessories. These games are distributed and available on a wide range of platforms across the globe. Additionally, Activision Blizzard maintains and operates Battle.net, a online-game service in which players can connect via the internet and play with each other online. Activision Blizzard has created some of the most recognized and successful game franchises including, Call of Duty, Guitar Hero, Tony Hawk, Spider-Man, James Bond, Starcraft, Diablo, Warcraft, and the #1 online subscription-based game in the world, World of Warcraft. Activision Blizzard, Inc. takes part in licensing agreements that enable them to publish games based on another company s products. For example, in order to create and publish the Spider-Man franchise, license agreements were obtained with Marvel. Publishing is the key segment, which generates the large majority of revenues. This segment is responsible for creating, marketing, and sales of their products. Activision Blizzard sells their products to mass retail outlets, electronics stores, game specialty stores, etc. Distributing accounts for a small portion of revenue. This contains the production of the video game software and accessories. They also sell this service to other video game publishers who don t have a distribution system in place. BUSINESS AND GROWTH STRATEGIES The strongest areas for growth recently have been in the online gaming sector. The market for online-based games has grown dramatically. Since 2000, online subscriptions for massively multiplayer online games has risen by an average of 47% per year in the US. Activision Blizzard is positioned perfectly for this with the current presence of World of Warcraft. Additionally, Starcraft II and Diablo III plan to be released within the next 2 years. The largest market that is poised for rapid growth in the video game industry is China. As their economy shifts, more and more gaming consumers are at the forefront of this industry. With a sales office, distributing center, and studio already in Shanghai, China, Activision Blizzard is ready to handle the increased capacity that is stemming from the Chinese market. Mergers and acquisitions has been a large part of Activision Blizzard s growth strategy. Past mergers and acquisitions have been very successful. They seek out game publishers who have a strong line of quality games that can be expanded upon. Past mergers and acquisitions include Blizzard Entertainment, RedOctane, and Bizzare Creations. It may be feasible for Activision Blizzard to look at acquiring competitor, Take-Two Interactive. Although a smaller player, Take-Two does have a great track record of successful game franchises that Activision Blizzard could take advantage of. MANAGEMENT AND EMPLOYEE RELATIONS CEO, Robert A. Kotick, has been with Activision Blizzard since February In addition to his duties as CEO, he is also a member of the board of directors. Kotick also has served on the board of directors of Yahoo!, Inc. since March

3 RECENT NEWS November 27, Call of Duty Franchise Surpasses $3 Billion in Retail Sales Worldwide. This shows how Activision Blizzard is able to expand on successful gaming franchises and continually develop their games to appeal to worldwide markets. November 27, CEO, Robert Kotick responds to WSJ article that video game sales are weakening. While Kotick did admit that there are economic concerns, the great thing about the video game industry is that the $ cost/per hour of entertainment heavily outweighs any other form of entertainment. November 22, 2009 Activison Stock Looks Inexpensive (Barron s). Barron s believes the stock in undervalued especially after the biggest first week of sales in video game history from Call of Duty: Modern Warfare 2. Barron s expects the stock to be priced at $15 to $16 within the next year. INDUSTRY Activision Blizzard, Inc. operates within the software publishing industry. While as a whole, this industry is extremely competitive, they operate exclusively in the video game sector. Interestingly enough, the demographics of the video game industry have been shifting as of recent years. Only 60% of today s gamers are male. This trend shows that there is a market for female gamers and that games need to be marketed to both gender audiences. In addition, 27% of today s gamers are over the age of 50, with an average gamer age of about 39 years old. Appealing to an older audience, also seems to be a growing trend in this industry. The video game publishing industry needs to be segmented to appeal to certain markets. First, is the console gaming industry, with the primary players being Microsoft, Sony, and Nintendo. Unfortunately, there are high costs associated with video game publishing for such consoles. When one of these major console manufacturers release a new console, product development for video game publishers increases as they need to format new products to match the new console s requirements. Currently, the primary consoles in the video game industry are Microsoft s Xbox 360, Sony s Playstation 3, and Nintendo s Wii. The Nintendo Wii has been revolutionary in regards to showing that gamers are looking for an interactive experience. This enabled video game publishers the opportunity to grow their titles to include interactive peripherals, such as Activision s Guitar Hero series. In addition to consoles such as the Xbox 360, Playstation 3, and Wii, these console manufacturers have produced handheld gaming devices as well (ex. Sony PSP and Nintendo DS). These handheld devices are geared towards younger audiences. This allows video game publishers an opportunity to gear their popular titles toward this younger demographic. Perhaps the most widely used console in the video game industry is the computer. This worldwide gaming machine has been the most rapidly growing in the video game publishing industry. Because its worldwide use and evergrowing online game segment, this is the video game publishing s largest market. However, due to the most rapid increases in technology, product development costs steadily increase. As Mac computers continue to grow in popularity, video game publishers need to be able respond to the increased use. Currently, many video game publishers exclusively develop games for PC s, as this is more cost effective. Expanding popular game titles to Mac users may be worth the additional costs. As stated earlier, the number of subscription-based online game users have been growing been at an average of 47% per year in the US. The leader of this segment being the World of Warcraft series. There are far fewer games that are more anticipated than the release of a large MMORPG. In addition, to being the fastest growing aspect of the video 3

4 game publishing industry, it also provides the greatest margins. Consumers purchase the initial product, generating revenue, then must pay a monthly subscription fee in order to play it, generating a constant revenue stream. Publishers can create expansions available for purchase to existing users. Since the expansions must fit the same system requirements as the initial product, development costs remain fairly low as the adaption to new technologies is very minimal. The video game publishing industry will continue in future years. As new technologies become available, gamers will be able to experience bigger and better entertainment. As we have seen, the typical gamer is shifting from the public perception of the adolescent male to an older, less gender-specific audience. The video game publishing industry needs to encapsulate this trend in order to continue to be successful. Although recession can negatively affect the industry, sales will remain strong because video games provide the best $ spent/per hour of entertainment than any other form of entertainment. Activision Blizzard is poised to take advantage of the interactive video game segment with their 4Q releases of DJ Hero and Tony Hawk, as well as, the computer online-gaming segment with releases of Starcraft II and Diablo III in the near future. As being the leader in the video game publishing industry, I am optimistic about the future of Activision Blizzard, Inc. S.W.O.T. ANALYSIS Strengths Strong line of successful game franchises that can be expanded. Licensing agreements with major companies to produce big-name titles. Positioned for continued success from the growth of the subscription-based online gaming industry. Mergers and acquisitions add to revenue and expand business to capture new audiences. Weaknesses High product development costs. Key revenue drivers are from a smaller number of game franchises. High risk in developing new/unproven franchises. Seasonal demand can negatively impact quarterly statements. Opportunities New gaming platforms to expand titles (potential creation of own platform). Expansion of increased titles to new gaming outlets (iphone apps, etc.). Increase use of interactive peripherals. Acquiring other publishing companies with strong titles. Potential for movie deals based on hit gaming titles. In-game advertisement. Expansion into growing international markets. Threats Government regulation and ratings association could negatively certain titles. 4

5 International regulation may make it difficult to enter/operate in some markets. Failure of high cost titles. Changing economic conditions that negatively affect consumer spending. Ever-changing platforms increase costs associated with product development. CATALYSTS Upside Activision Blizzard, Inc. relies are providing gamer consumers with products that are innovative and exciting. Having such strong game franchises under their belt, they are poised to take advantage of expanding these titles. Activison Blizzard, Inc. is one of the leaders in interactive gaming with the Guitar Hero, Tony Hawk, etc. franchises. With the announcement of Starcraft II and Diablo III coming in the near future, they are in line to take advantage of not only building on successful past titles, but capturing the growth of the online PC-gaming market. Downside Weakening economic conditions can put strong downward pressure on Activision Blizzard, Inc. By losing revenue to weak sales data, the stock price suffers. Being able to release games timely in heavy spending seasons is critical. With the upcoming holiday season, not being able to release a game in time can be harsh on earnings. However, Activision Blizzard, Inc. was able to release the most anticipated games of the year before the holidays this year, including Modern Warfare 2, Tony Hawk, and DJ Hero. 5

6 COMPARABLES ANALYSIS Activision Blizzard, Inc. generates most all of its revenue from video game publishing and distribution. When choosing comparable companies I wanted to choose those that generated their revenue in the same way. Since these companies generate revenue the same with similar products, the same risks would apply to them as well. For this analysis I chose Electronic Arts (ERTS), Take-Two Interactive (TTWO), and THQ Inc. (THQI). Electronic Arts (ERTS) 33.3% Weighting Electronic Arts Inc. develops, markets, publishes, and distributes video game software and content. Its software and content are playable on various consumer platforms, such as video game consoles, personal computers, handheld game players, and wireless devices, such as cellular and smart phones. The company develops and markets a portfolio of games under the EA brand in categories, such as action-adventure, role playing, racing, and combat games; and massively-multiplayer online role-playing games under the EA Games label. It also provides a collection of sportsbased video games, such as simulated sports based on real-world sports leagues, players, events, and venues, as well as casual games with arcade-style gameplay and graphics under EA SPORT label. In addition, the company creates games under EA Play label for core and non-core gamers of various ages, which include life simulation games, The Sims and MySims; and games published under licenses, such as Harry Potter under license from Warner Bros.; and video games based on Hasbro board games and toys. Further, it offers casual games, such as card games, puzzle games, and word games through its Pogo online service, as well as provides Internet-based advertising and digital content; and games and other content for wireless devices through wireless carriers. The company provides its products through mass market retailers, electronics specialty stores, game software specialty stores, online stores, and mail-order, as well as distributors. It has operations in North America, Europe, Australia, Asia, and Latin America. Electronic Arts Inc. was founded in 1982 and is headquartered in Redwood City, California. Yahoo! Finance Electronic Arts was chosen because of the large number of similarities it shares with Activision Blizzard, Inc. It generates its revenue through publishing and distributing video game software. Additionally, they operate with a very successful line of video games, most famous being their Madden football game franchise. Just as Activision Blizzard, Inc. obtains license agreements to publish games, EA does the same as evident in its publishing of the Harry Potter games. Both companies provide online services for gamers and all products are sold through the same retail outlets. EA is subject to the same economic and product risks as Activision Blizzard. After looking at these factors, I believe an equal weighting of 33.3% will suffice for this comparables analysis, as all other companies selected share similar details. Take-Two Interactive (TTWO) 33.3% Weighting 6

7 Take-Two Interactive Software, Inc. publishes, develops, and distributes interactive entertainment software, hardware, and accessories worldwide. The company s product offerings include titles for various platforms, including PlayStation3 and PlayStation2 computer entertainment systems, PlayStationPortable system, Xbox 360 video game and entertainment system from Microsoft, Wii, and Nintendo DS, as well as for the personal computer. It publishes and develops products through its wholly owned labels Rockstar Games and 2K, which publish titles under 2K Games, 2K Sports, and 2K Play. The company, through its subsidiary, Jack of All Games, also distributes software, hardware, and accessories in North America. Take-Two s proprietary brand franchises include Grand Theft Auto; Sid Meier's Civilization; Max Payne; Midnight Club; Manhunt; Red Dead Revolver; Bully; BioShock; Sid Meier's Railroads!; Sid Meier's Pirates!; Carnival Games; and Top Spin. Its licensed brands include the sports games Major League Baseball 2K; NBA 2K; and NHL 2K. The company sells its software titles to retail outlets through direct relationships with large retail customers and third party distributors. Take-Two s customers include mass merchandisers, specialty retailers, video stores, electronics stores, toy stores, national and regional drug stores, and supermarket and discount store chains. The company was founded in 1993 and is headquartered in New York, New York. Yahoo! Finance Just like Activision Blizzard and Electronic Arts, Take-Two operates in the video game publishing industry and maintains revenue through game sales from retail outlets. Take-Two has been successful through expanding on proven popular titles such as Grand Theft Auto and their 2K sports franchise. While being susceptible to the same risks as Activision Blizzard, Inc., I also chose a 33.3% weighting for Take-Two in my comparables analysis. THQ, Inc. (THQI) 33.3% Weighting THQ Inc., together with its subsidiaries, engages in the development, publishing, and distribution of interactive entertainment software for various game systems worldwide. It offers video games, and other interactive software and content for play on home video game consoles, such as Microsoft Xbox 360, Nintendo Wii, Sony PlayStation 3, and Sony PlayStation 2; handheld platforms, including Nintendo Dual Screen and Game Boy Advance, PSP portable entertainment system, and wireless devices; personal computers; and online. The company s titles span various categories comprising action, adventure, fighting, racing, role-playing, simulation, sports, and strategy. THQ markets and distributes games to mass merchandisers, consumer electronic stores, discount warehouses, and other national retail chain stores directly, and to grocery and drug stores through regional retailers and distributors, as well as games through Internet and iphone in North America, Europe, and the Asia Pacific. The company was founded in 1989 and is based in Agoura Hills, California. Yahoo! Finance Although THQ is the smallest of my comparables, in terms of market cap, they are still weighted the same as Electronic Arts and Take-Two at 33.3%. This is justified because of the similar business model and the generation of revenue through video game publishing and distribution. THQ operates a strong portfolio of titles through a variety of genres. Since THQ s products are sold in the same retail outlets as Activision Blizzard, EA, and Take-Two, they are open to the same risks associated in this market. 7

8 Metrics I chose three key metrics that I felt were essential in valuing the stock of Activision Blizzard, Inc. EV/Revenue was the first metric used. Since all comparable companies used generate their revenue through very similar processes, EV/Revenue is a very important metric to use in this valuation. Weighting for EV/Revenue was set at 40%, given the similarities. In addition, EV/Gross Profit was used. Much like EV/Revenue, EV/Gross Profit was selected given that since these companies generate revenue the same, their cost of goods sale will be affected equally. Therefore, EV/Gross Profit was applied a 40% weighting as well. Lastly, EV/EBITDA was used. Activision Blizzard, Inc. has taken part in several acquisitions and mergers, increasing their assets. This also makes depreciation rather high. Additionally, tax rates can vary among companies and the locations they operate in. Therefore, EBITDA became the best measure to use as it disregards the depreciation from acquisitions and taxes assumed throughout operations. Unfortunately, Electronic Arts has a large negative EV/EBITDA and THQ has a very small EV/EBITDA. Therefore, I chose to weight this multiple only at 20%, as it did not appear to as relatable to the business of Activision Blizzard, Inc. As a result, my comparables analysis yielded an implied price of $4.74, achieving an overvaluation of the ATVI s current $11.39 stock price (11/30/2009) of 58.34%. Out of the comparables, all of them are operating with negative trailing twelve months net income. Meanwhile, Activision Blizzard is posting strong net income this year, which is expected to continue in the future. Therefore, I opted to weight my comparables analysis at 30% for my final ATVI stock price derivation. DISCOUNTED CASH FLOW ANALYSIS Throughout my discounted cash flow analysis, the percentage of sales method was used. This enabled me to reflect on historic information as well as future guidance to project forward. Revenues Revenue growth was project using company guidance from conference calls, growth in global markets, and industry growth estimates. For the 4 th quarter 2009 projections, I relied on information based on sales of their marquee games being released including Call of Duty: Modern Warfare 2, Tony Hawk, and DJ hero. Modern Warfare 2 is anticipated to account for $2 billion worth of Q revenues and has already sold $550 million worth in the first week of release. For 2010, revenues were projected to grow by another 22.45%, stemming from released of their PC game franchises Starcraft II and Diablo III. Going forward, it is difficult to project growth without key information about game releases. Therefore, IBIS world and company guidance were used to project over the following nine years based on industry growth as a whole. Key Statistics I wanted to remain conservative in my estimates of future projections. The video game industry changes very rapidly and is near impossible to predict when major changes will occur. Releases of major video games and major consoles will have a large effect on revenues and costs. However, staying conservative, I projected revenues based on industry growth and used a constant % of revenue cost of goods sold projection as it is extremely difficult to predict when these changes will occur. Activision Blizzard, Inc. has the resources available and distribution networks in place to respond and adapt to these changes, if they were to occur. Activision Blizzard does look to acquire small video game publishers with a strong portfolio of successful games. Although difficult to predict when and who, capital expenditures were grown year to year to encompass any potential acquisitions that may be made over the coming years. 8

9 Beta Beta for Activision Blizzard, Inc. was determined by running a regression against the S&P 500 for the past 5 years of monthly data. In turn, this resulted in a beta for ATVI of Although comparable companies have much higher betas passed on a regression analysis (ERTS = 1.308, TTWO = 1.26, THQI = 2.256), I believe this is still an accurate representation. ATVI has the largest market cap out of these comparable companies and is the only one that is operating with positive trailing twelve month net income. As a result, the lower beta appears to be accurate given this data. DCF Implied Price After completing the DCF analysis, an implied price of $15.25 was the result. This shows an undervaluation of 33.91% from the current $11.39 stock price as of 11/30/2009. I chose to weight my DCF analysis at 70%, given that Activision Blizzard is the largest of its comparable companies with the strongest financials. RECOMMENDATION With a 70% weight from the DCF analysis and a 30% weight from the comparables analysis, we derive at an overall target price of $ This shows that the stock, ATVI, is currently undervalued by 6.21%. Activision Blizzard will see continue to see growth from its already popular game titles, online-gaming genre, and international demand. They are positioned well to handle any changes in technology or consumer trends. In conclusion, I am recommending a HOLD of ATVI for all portfolios. 9

10 APPENDIX 1 COMPARABLES ANALYSIS Comparables Analysis Activision Blizzard Electronic Arts Take-Two Interactive THQ Weight 33.33% 33.33% 33.33% Price $11.45 $17.25 $11.42 $ Weeks (Range) $ $13.14 $ $23.76 $ $12.81 $ $9.03 Shares Outstanding 1,271,000, ,000,000 76,994,000 67,462,000 Beta (Regression) Market Cap $14,552,950,000 $5,589,000,000 $879,271,480 $331,913,040 Enterprise Value $11,831,950,000 $3,964,000,000 $842,482,480 $222,993,040 Cash and Short Term Investments $2,721,000,000 $1,625,000,000 $174,789,000 $208,920,000 Long-term Debt $0 $0 $138,000,000 $100,000,000 Revenue (TTM) $4,361,000,000 $3,946,000,000 $948,530,000 $872,360,000 Gross Profits (TTM) $1,833,000,000 $1,758,000,000 $246,360,000 $155,170,000 COGS (TTM) $2,528,000,000 $2,188,000,000 $702,170,000 $717,190,000 EBITDA (TTM) $828,000,000 ($394,000,000) $55,480,000 $314,740,000 Metrics Weighted Average Implied Value Weight EV/Revenue $ % EV/Gross Profit $ % EV/EBITDA $ % Implied Price $4.74 Current Price $11.39 Under (Over) Valued % 10

11 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS (Amounts in Millions) 2007A 2008A 2009Q1-Q3A 2009Q4E 2009A+E Net Revenue $1,349 $3,026 $2,722 $2,910 $5,632 $6,896 $8,000 $9,040 $10,034 $10,987 $11,976 $13,054 $14,229 $15,510 $16,905 Growth Rate % 86.12% 22.45% 16.00% 13.00% 11.00% 9.50% 9.00% 9.00% 9.00% 9.00% 9.00% Total COGS $436 $1,839 $1,295 $1,387 $2,682 $3, $3, $4, $4, $5, $5, $6, $6, $7, $8, % of Revenue 32.32% 60.77% 47.58% 47.68% 47.63% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% Gross Profit $913 $1,187 $1,427 $1,523 $2,950 $3,586 $4,160 $4,701 $5,218 $5,713 $6,228 $6,788 $7,399 $8,065 $8,791 % of Revenue 67.68% 39.23% 52.42% 52.32% 52.37% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00% Total Operating Expenses $734 $1,420 $1,021 $1,063 $2,084 $2, $3, $3, $3, $4, $4, $5, $5, $6, $6, % of Revenue 54.41% 46.93% 37.51% 36.53% 37.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% Operating Income (Loss) $179 ($233) $406 $460 $866 $897 $1,040 $1,175 $1,304 $1,428 $1,557 $1,697 $1,850 $2,016 $2,198 % of Revenue 13.27% -7.70% 14.92% 15.79% 15.37% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% Investment Income (Loss), Net ($4) $46 $21 $25 $46 $57.24 $66.40 $75.03 $83.28 $91.20 $99.40 $ $ $ $ % of Revenue -0.30% 1.52% 0.77% 0.86% 0.82% 0.83% 0.83% 0.83% 0.83% 0.83% 0.83% 0.83% 0.83% 0.83% 0.83% Income (Loss) Before Income Tax Benefit $175 ($187) $427 $485 $912 $954 $1,106 $1,250 $1,388 $1,520 $1,656 $1,805 $1,968 $2,145 $2,338 % of Revenue 12.97% -6.18% 15.69% 16.65% 16.18% 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% 13.83% Income Tax Provision ($52) ($80) $28 $163 $191 $ $ $ $ $ $ $ $ $ $ Tax Rate % 42.78% 6.56% 5.60% 20.95% 32.00% 32.00% 32.00% 32.00% 32.00% 32.00% 32.00% 32.00% 32.00% 32.00% Net Income (Loss) $227 ($107) $399 $322 $721 $649 $752 $850 $944 $1,033 $1,126 $1,228 $1,338 $1,459 $1,590 % of Revenue 16.83% -3.54% 14.66% 11.05% 12.79% 9.40% 9.40% 9.40% 9.40% 9.40% 9.40% 9.40% 9.40% 9.40% 9.40% Add Back: Depreciation and Amortization $63 $385 $385 $327 $712 $ $ $ $ $ $ $ $ $ $ % of Revenue 4.67% 12.72% 14.14% 11.25% 10.50% 10.00% 8.00% 6.00% 4.00% 3.00% 3.00% 2.50% 2.50% 2.50% 2.50% Add back: Interest Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Current Assets $333 $2,493 $1,787 $1,910 $1,910 $2, $3, $3, $4, $4, $4, $5, $5, $6, $7, % of Revenue 24.68% 82.39% 65.65% 65.65% 33.91% 40.00% 40.25% 40.50% 40.75% 41.00% 41.25% 41.50% 41.75% 42.00% 42.25% Current Liabilities $528 $2,320 $1,230 $1,645 $1,645 $2, $2, $2, $3, $3, $3, $3, $4, $4, $5, % of Revenue 39.14% 76.67% 45.19% 56.53% 29.21% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% Net Working Capital ($195) $173 $557 $265 $265 $690 $820 $949 $1,079 $1,209 $1,347 $1,501 $1,672 $1,861 $2,071 % of Revenue % 5.72% 20.46% 9.12% 4.71% 10.00% 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00% 12.25% Change in Working Capital $368 -$292 $92 $425 $130 $129 $129 $130 $139 $154 $171 $189 $210 Cash Flow from Operations $290 ($90) $784 $941 $1,341 $914 $1,262 $1,263 $1,216 $1,233 $1,347 $1,400 $1,523 $1,657 $1,803 Capital Expenditures $68 $46 $75 $47 $122 $ $ $ $ $ $ $ $ $ $ % of Revenue 5.04% 1.52% 2.76% 1.62% 2.17% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.00% Free Cash Flow ($136) $894 $1,219 $776 $1,082 $1,037 $940 $903 $958 $943 $990 $1,037 $1,127 PV of FCF $ $ $ $ $ $ $ $ $ $ $ Discount

12 APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions 10 Year Treasury 3.201% Terminal Growth Rate 3.00% Beta (Regression) Terminal Value $25, Market Risk Premium 7.00% PV Terminal $11, % Equity % Σ PV of Free Cash Flow $7, % Debt 0.00% Long Term Debt $0 Return on Debt N/A Firm Value $19, Return on Equity 7.576% Shares Outstanding 1,271 WACC 7.576% Implied Price $15.25 Current Price $11.39 Undervalued 33.91% APPENDIX 4 BETA SENSITIVITY ANALYSIS Beta Sensitivity Standard Error = β σ Implied Price Under (Over) Valued % $ % $ % $ % $ % $ % $ % $ % $ % $ % 12

13 APPENDIX 5 BETA REGRESSION STATISTICS Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 60 ANOVA df SS MS F Significance F Regression Residual Total Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept X Variable

14 APPENDIX 6 SOURCES UOIG Members (Audrey Zhao, Matt Doty, Tyler Stone, Sheldon Summers, Lee Lenker) Yahoo! Finance Google Finance IBIS World Activision Blizzard Investor Relations SEC Filings Gamespot IGN 14