Activision Blizzard Inc ATVI (XNAS) : Activision Posts Strong Start To 2020 Call of Duty Drives Growth

Morningstar Equity Analyst Report | Report as of 01 Jul 2020 10:24, UTC | Page 1 of 12
Activision Blizzard Inc ATVI (XNAS)

Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship
QQ 78.03 USD 66.00 USD 1.18 0.54 0.53 60.12 Electronic Gaming Standard
01 Jul 2020 01 Jul 2020 24 Sep 2019 01 Jul 2020 01 Jul 2020 01 Jul 2020 & Multimedia
21:46, UTC 21:00, UTC
Morningstar Pillars Analyst Quantitative Important Disclosure:

Economic Moat Narrow Narrow The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of),
Valuation QQ Overvalued and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/equitydisclosures
Uncertainty High Medium
Financial Health — Strong Activision Posts Strong Start to 2020; Call of Duty Drives Growth
Source: Morningstar Equity Research
Quantitative Valuation
ATVI Business Strategy and Outlook could take until beyond 2020 to appear.
USAi
Neil Macker, CFA, Analyst, 13 April 2020
Undervalued Fairly Valued Overvalued Activision Blizzard is one of the world's largest third-party Analyst Note
video game publishers and owns some of the largest and Neil Macker, CFA, Analyst, 05 May 2020
Current 5-Yr Avg Sector Country
Price/Quant Fair Value 1.18 1.03 0.84 0.83
well-known video game franchises, including Call of Duty Activision Blizzard started 2020 on a very strong note as
Price/Earnings 37.6 51.0 15.3 20.1 and World of Warcraft. We believe the firm is well placed top- and bottom-line non-GAAP results beat both the
Forward P/E 30.9 — 14.6 13.9 to consolidate its leading position by developing FactSet consensus and guidance. The Call of Duty
Price/Cash Flow 38.3 20.1 6.0 13.1 compelling new versions of its existing franchises and by franchise had an impressive quarter by itself as Modern
Price/Free Cash Flow 41.5 21.7 15.6 19.5
Trailing Dividend Yield% 0.54 0.63 4.22 2.35
introducing new experiences, such as Hearthstone and Warfare posted the highest sales for a non-launch quarter
Source: Morningstar Overwatch. We expect Activision to continue to benefit and Warzone, the free-to-play battle royale game, has
from the upcoming console upgrade cycle, the ongoing already hit 60 million players after launching March. We
Bulls Say revitalization of PC gaming, and the growth in the mobile are maintaining our narrow moat rating and plan to
OActivision has established a record of creating market via its King Digital subsidiary. modestly adjust our $66 fair value estimate.
multi-billion-dollar franchises and consistently
develops new revenue streams through innovative Activision has capitalized on the shift in the industry Non-GAAP revenue for the quarter improved 30% year
value-added methods. toward a bifurcated market consisting of major AAA over year to $1.5 billion (versus guidance of $1.3 billion).
OCall of Duty will remain one of the top-selling blockbuster titles on one side and smaller indie games on Console non-GAAP revenue improved by 30% year over
shooting games on an annual basis. The franchise the other side. Activision generally focuses on the higher year to $363 million as the strong quarter for CoD made
will also continue to adapt to changes in player end of the market, using its capital to fund higher-budget up for the strong sales comparison of Sekiro in last year’s
preferences by adding new modes like Blackout, blockbusters and its marketing scale to support its titles quarter. Microtransactions for Modern Warfare in the
CoD’s take on the battle royale genre. across multiple advertising platforms. Activision's quarter were double that of Black Ops 4, driven in part by
OThe firm is home to not only some of the largest primary competition remains other large third-party Warzone. PC non-GAAP revenue improved 39% to $479
franchises in Call of Duty, Diablo, Warcraft, publishers, such as Take-Two and EA, as well as console million due to the launch of Warcraft III Reforged and
Hearthstone, and Overwatch, but also to some of the manufacturers (and first-party publishers) Sony and growth in the World of Warcraft player base. Mobile
industry’s best development talent. Microsoft. revenue was flat in the quarter as the 75% growth in
advertising net bookings was offset by the lower in-game
Like its peers, the firm is focused on engaging users transactions as King is attempting to improve player
Bears Say
beyond the initial game sale via extending the engagement. Non-GAAP operating margin for the quarter
OFurther subscriber declines for World of Warcraft
monetization window by expanding the use of multiplayer improved to 36% from 24% last year as the higher revenue
could disproportionately affect Activision's profitability.
options and releasing downloadable content. Both more than offset the investments in game development
OActivision entered mobile gaming well after some
methods encourage gamers to hold on to the original game and game operations.
of its peers, which could put it at a disadvantage to
longer than in previous generations and provide an income
competitors like EA that are increasing user
stream from consumers who purchase the game While the firm has benefited from the COVID-19 pandemic
engagement through cross-platform strategies.
secondhand. Activision has used DLC and multiplayer to in terms of people staying at home, the long-awaited
OCompetitors have emulated Activision's strategy extend the life of multi-billion-dollar franchises such as local-city based season of Overwatch League has
of streamlining investments into a few titles to Call of Duty, and we believe newer franchises like obviously been delayed. Management remains positive
develop deeply immersive and engaging games that Hearthstone and Overwatch can also sustain long-term around the recent season, touting increased engagement
can compete with Activision's biggest franchises. success. in March and viewing of the current third season. However,
the game and the esport league appear to be in a holding
We expect Activision to continue to monetize the user pattern awaiting the launch of Overwatch 2, which may
base at King Digital by inserting additional third-party ads not happen until 2021.
in the company’s mobile games. While we think Activision
can generate some additional revenue via this path, we Economic Moat
would caution that a substantial revenue contribution Neil Macker, Analyst, 13 April 2020
?
© Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided
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Morningstar Equity Analyst Report |Page 2 of 12

21:46, UTC 21:00, UTC
Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Neil Macker, Analyst, 27 March 2020
Electronic Arts Inc EA USD 39,040 5,537 26.19 13.12 Our fair value estimate of $66 per share implies 2020
adjusted price/earnings of 37 times, an enterprise
Take-Two Interactive Software Inc TTWO USD 16,420 3,089 13.77 40.65
value/adjusted EBITDA multiple of approximately 24, and
Ubisoft Entertainment UBI EUR 8,898 1,595 2.59 0.00
a free cash flow yield of 3%.
We assign Activision a narrow moat. Activision Blizzard Activision underwent a transition year in 2019 as the firm
is one of the world's largest third-party video game expanded its development staff and focused on its six core
publishers and the firm behind some of the most franchises--Call of Duty, Candy, Overwatch, Warcraft,
compelling and lucrative franchises of all time. Over the Hearthstone, and Diablo. As a result of the transition,
last 10 years, the video game industry has undergone a revenue for 2019 fell 14% to $6.5 billion as Blizzard did
number of changes including two console generation not launch any new titles or expansion. Operating margins
transitions; the rise of digital downloads; widespread for the year actually increased 26.8% from 26.5% in 2018
adoption of mobile games; and the expansion of the as the firm’s announced workforce reduction more than
free-to-play, or F2P, business model. Over this same offset the increased hiring of developers and lower
period, Activision (the predecessor company) has revenue.
transitioned from a console-based video game publisher
to the one of the largest publishers on both consoles and In aggregate, we project the firm's average revenue
the PC via the 2008 merger with Blizzard (then owned by growth to average 6% over the next five years. We expect
Vivendi). The firm owns seven franchises that have the mobile segment to grow 8%, as the decline of Candy
grossed over $1 billion in revenue--World of Warcraft, Call Crush Saga is offset by growth from new King Digital
of Duty, Skylanders, Diablo, StarCraft, Overwatch, and properties, the reintroduction of third-party ads, and
Hearthstone. Activision/Blizzard mobile efforts. Outside of mobile, we
project 7% growth in PC revenue for 2020 to 2024 and 6%
Its portfolio of widely successful franchises allows the growth in console revenue over the same period. We
firm to monetize its intellectual property year after year envision operating margins expanding to 31.3% in 2024
by delivering content via sequels, expansion packs, from 26.8% in 2019. While our 2024 projection comes in
downloadable content, or DLC, and toys, exemplified by above the high-water margin mark of 28.3% set in 2015,
the decade-old World of Warcraft franchise and the we believe that the growth in high-margin digital sales
annual versions of Call of Duty. These franchises can also and microtransactions will more than offset the
spawn games that move the company into new arenas diminishing contribution from the high-margin World of
such as F2P (Hearthstone from WoW) and China (Call of Warcraft game.
Duty Online). The company's franchises have a dedicated
user base, providing Activision with the leverage to push Risk & Uncertainty
more of its games via direct digital channels thus Neil Macker, Analyst, 13 April 2020
bypassing retailers, generating higher gross margins and Activision's focus on developing franchises could backfire
improving returns on invested capital. if any of its franchises fall out of favor with gamers. The
annual release cycle of franchises such as Call of Duty
We believe that the console and PC video game market could cause consumer fatigue and lower sales. World of
will continue to largely fragment into two tiers: AAA Warcraft generates excellent margins for Activision, but
games with large budgets and indie games with small the game has been hemorrhaging users despite a recent
budgets. Activision’s size and the depth of its franchise expansion. We expect there could be a disproportionate
slate allow the firm to place larger bets on new IP than impact on the bottom line if the company can't reinvigorate
many smaller midsize competitors. This ability to make its WoW user base. Success attracts imitators, and the
larger investments marks the publisher as one of a few company must constantly fend off competitive attacks
destinations for studios looking to develop new from industry rivals while also trying to develop new IP.
large-budget AAA games. Consumers have limited discretionary dollars to spend,
and as fashions and trends cycle, there could be a
Fair Value & Profit Drivers disproportionate impact on Activision's cash flow.
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21:46, UTC 21:00, UTC
Activision is not as exposed to the mobile/tablet market

as some of its competitors and may lose overall market
and mind share to those firms as this market becomes
more important.
Stewardship
Neil Macker, Analyst, 09 October 2019
We rate Activision's stewardship as Standard. We believe
that CEO Robert Kotick has protected the firm's autonomy
and acted in the best interests of shareholders in the
buyout of the Vivendi stake. Previously the chairman and
CEO of Activision, Kotick has served as CEO and president
of Activision Blizzard since the merger closed in 2008 and
headed the investment group that assisted in buying out
Vivendi. Kotick led the company to focus on franchises
such as Call of Duty and World of Warcraft, which helped
to solidify Activision Blizzard as one of the largest global
pure-play interactive entertainment firms. Brian Kelly has
held the position as Activision's sole chairman following
the resignation of Vivendi's six directors.
While much of the management team had been in place

for a number of years, there have been two recent
high-profile departures as the CEOs of the Activision and
Blizzard publishing units resigned during 2018. Former
Activision CEO Eric Hirshberg left his post in March after
eight years of running the Call of Duty publishing unit. The
CEO role was filled in January 2019 by Rob Kostich who
previously served as the GM for the Call of Duty franchise.
Blizzard CEO Mike Morhaime resigned in October 2018.
Morhaime was one three cofounders of Blizzard, best
known for its Warcraft, Diablo, and Starcraft franchises.
While the company has not named a replacement for
Hirshberg, Blizzard did announce that J. Allen Brack,
executive producer for World of Warcraft, will lead the
unit as president and be joined on the executive team by
the other two cofounders of Blizzard. We think the Blizzard
announcement highlights the depth and continuity of the
management bench at Activision Blizzard.
While we still have some reservations around the $6

billion price paid for King Digital, we believe the company
will recoup its investment in the mobile publisher. We
expect Activision to focus on integrating King Digital and
organic growth instead of making another large-scale
acquisition. We believe that the focus at King will be on
accelerating the growth of ad revenue within existing
games and using the development talent to create mobile
versions of the firm’s biggest franchises.
?

21:46, UTC 21:00, UTC
over year to $1.5 billion (versus guidance of $1.3 billion).

Analyst Notes Archive Console non-GAAP revenue improved by 30% year over
year to $363 million as the strong quarter for CoD made
Activision Posts In-Line Q4 to End Transitional 2019; up for the strong sales comparison of Sekiro in last year’s
Focus Remains on Six Core Franchises quarter. Microtransactions for Modern Warfare in the
Neil Macker, Analyst, 07 February 2020 quarter were double that of Black Ops 4, driven in part by
Activision Blizzard ended its transitional 2019 on an in-line Warzone. PC non-GAAP revenue improved 39% to $479
note as top- and bottom-line fourth-quarter non-GAAP million due to the launch of Warcraft III Reforged and
results meet the FactSet consensus. The firm issued growth in the World of Warcraft player base. Mobile
somewhat conservative guidance for 2020 as the target revenue was flat in the quarter as the 75% growth in
for non-GAAP 2020 revenue of $6.73 billion is slightly advertising net bookings was offset by the lower in-game
below the previous consensus estimate of $6.91 billion. transactions as King is attempting to improve player
Key titles for 2020 include the next World of Warcraft engagement. Non-GAAP operating margin for the quarter
expansion, the latest installment of Call of Duty, Diablo improved to 36% from 24% last year as the higher revenue
Immortal, and possibly, Overwatch 2. We are maintaining more than offset the investments in game development
our narrow economic moat rating and our fair value and game operations.
estimate of $66 as we still project a return to growth for
the firm in 2021 and beyond. While the firm has benefited from the COVID-19 pandemic
in terms of people staying at home, the long-awaited
GAAP revenue for the quarter fell 17% year over year to local-city based season of Overwatch League has
$2.0 billion (versus guidance of $1.8 billion). Console obviously been delayed. Management remains positive
GAAP revenue declined by 26% year over year to $595 around the recent season, touting increased engagement
million despite a strong launch for CoD: Modern Warfare in March and viewing of the current third season. However,
in the quarter, as last year’s quarter included strong sales the game and the esport league appear to be in a holding
of the Destiny 2 expansion. Sell-through for Modern pattern awaiting the launch of Overwatch 2, which may
Warfare was up double digits over last year’s Black Ops not happen until 2021.
4 installment. PC GAAP revenue decreased 28% to $521
million as the fourth quarter last year benefited from both
Destiny 2 and the WoW expansion. Mobile revenue, up
6% in the quarter, was driven by 80% year over year
growth in advertising net bookings. GAAP operating
margin for the quarter fell to 23% from 29% last year as
the lower revenue more than offset the benefit from cost
controls and lower headcount.
Activision Posts Strong Start to 2020; Call of Duty

Drives Growth
Neil Macker, Analyst, 05 May 2020
Activision Blizzard started 2020 on a very strong note as
top- and bottom-line non-GAAP results beat both the
FactSet consensus and guidance. The Call of Duty
franchise had an impressive quarter by itself as Modern
Warfare posted the highest sales for a non-launch quarter
and Warzone, the free-to-play battle royale game, has
already hit 60 million players after launching March. We
are maintaining our narrow moat rating and plan to
modestly adjust our $66 fair value estimate.
Non-GAAP revenue for the quarter improved 30% year
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Quantitative Equity Report | Release: 01 Jul 2020, 17:25 UTC | Reporting Currency: USD | Trading Currency: USD | Exchange:XNAS Page
Page 5 of1 12
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Activision Blizzard Inc ATVI QQ 01 Jul 2020 02:00 UTC

Last Close Fair ValueQ Market Cap Sector Industry Country of Domicile
01 Jul 2020 01 Jul 2020 02:00 UTC 01 Jul 2020
78.03 64.56 58,479.8 Mil i Communication Services Electronic Gaming & USA United States
Multimedia
There is no one analyst in which a Quantitative Fair Value Estimate and Quantitative
Star Rating are attributed to; however, Mr. Lee Davidson, Head of Quantitative
Price vs. Quantitative Fair Value
Research for Morningstar, Inc., is responsible for overseeing the methodology that 2016 2017 2018 2019 2020 2021 Quantitative Fair Value Estimate
supports the quantitative fair value. As an employee of Morningstar, Inc., Mr. Total Return
Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Securities
Trading Policy in carrying out his responsibilities. For information regarding Conflicts Sales/Share
100
of Interests, visit http://global.morningstar.com/equitydisclosures Forecast Range
Forcasted Price
80 Dividend
Company Profile
Split
Activision Blizzard was formed in 2008 by the merger of Momentum: Positive
60
Activision, one of the largest console video game publishers, Standard Deviation: 30.50
and Blizzard, one of largest PC video game publishers. The Liquidity: High
40
combined firm remains one of the world's largest video game
publishers. Activision's impressive franchise portfolio includes 44.81 52-Wk 78.23
World of Warcraft, which boasts more than $8 billion of 20
lifetime sales, and Call of Duty, which has sold over 175 24.04 5-Yr 84.68
million copies across 14 titles over 12 years.
-6.0 76.2 -25.9 28.4 32.0 Total Return %
-18.5 54.7 -20.9 -2.8 35.1 +/– Market (Morningstar US Index)
Quantitative Scores Scores 0.72 0.47 0.73 0.62 0.54 Trailing Dividend Yield %
All Rel Sector Rel Country 0.72 0.47 0.73 0.62 0.54 Forward Dividend Yield %
Quantitative Moat Narrow 99 99 98 31.4 43.3 62.1 28.2 37.6 Price/Earnings
Valuation Overvalued 4 5 6 4.6 6.9 5.0 6.6 9.1 Price/Revenue
Quantitative Uncertainty Medium 100 100 99 Morningstar RatingQ
Financial Health Strong 96 85 96 QQQQQ
QQQQ
QQQ
ATVI QQ
USAi
Q
2015 2016 2017 2018 2019 TTM Financials (Fiscal Year in Mil)
Undervalued Fairly Valued Overvalued 4,664 6,608 7,017 7,500 6,489 6,452 Revenue
Source: Morningstar Equity Research 5.8 41.7 6.2 6.9 -13.5 -0.6 % Change
1,319 1,412 1,309 1,988 1,739 1,747 Operating Income
11.5 7.1 -7.3 51.9 -12.5 0.5 % Change
Valuation Sector Country
Current 5-Yr Avg Median Median 892 966 273 1,813 1,503 1,561 Net Income
Price/Quant Fair Value 1.18 1.03 0.84 0.83 1,192 2,155 2,213 1,790 1,831 1,529 Operating Cash Flow
Price/Earnings 37.6 51.0 15.3 20.1 -111 -136 -155 -131 -116 -117 Capital Spending
Forward P/E 30.9 — 14.6 13.9 1,081 2,019 2,058 1,659 1,715 1,412 Free Cash Flow
Price/Cash Flow 38.3 20.1 6.0 13.1 23.2 30.6 29.3 22.1 26.4 21.9 % Sales
Price/Free Cash Flow 41.5 21.7 15.6 19.5 1.19 1.28 0.36 2.35 1.95 2.02 EPS
Trailing Dividend Yield % 0.54 0.63 4.22 2.35 5.3 7.6 -71.9 552.8 -17.0 3.6 % Change
Price/Book 4.5 3.8 2.0 2.4 1.70 2.90 2.35 2.31 2.34 1.83 Free Cash Flow/Share
Price/Sales 9.1 5.8 1.3 2.4 0.23 0.26 0.30 0.34 0.37 0.00 Dividends/Share
10.88 11.83 13.16 13.96 15.92 16.90 Book Value/Share
Profitability Sector Country 734,503 745,487 757,505 763,418 768,760 770,485 Shares Outstanding (K)
Current 5-Yr Avg Median Median
Profitability
Return on Equity % 12.7 11.2 13.0 12.9
11.5 11.2 2.9 17.4 12.4 12.7 Return on Equity %
Return on Assets % 8.3 6.3 4.8 5.2
5.9 5.9 1.5 9.9 8.0 8.3 Return on Assets %
Revenue/Employee (K) 701.3 701.2 685.3 325.9
18.9 14.6 3.9 24.2 23.2 24.2 Net Margin %
0.31 0.40 0.39 0.41 0.34 0.34 Asset Turnover
Financial Health Sector Country
Current 5-Yr Avg Median Median 1.9 1.9 2.0 1.6 1.5 1.5 Financial Leverage
Distance to Default 0.8 0.7 0.5 0.5 66.0 63.8 64.4 66.4 67.7 68.4 Gross Margin %
Solvency Score 277.0 — 527.0 552.4 28.3 21.4 18.7 26.5 26.8 27.1 Operating Margin %
Assets/Equity 1.5 1.8 1.9 1.7 4,079 4,887 4,390 2,671 2,675 2,675 Long-Term Debt
Long-Term Debt/Equity 0.2 0.4 0.3 0.4 8,068 9,119 9,462 11,357 12,805 13,021 Total Equity
27.0 29.6 25.4 26.0 24.3 25.8 Fixed Asset Turns
Growth Per Share Quarterly Revenue & EPS Revenue Growth Year On Year %
1-Year 3-Year 5-Year 10-Year Revenue (Mil) Mar Jun Sep Dec Total
Revenue % -13.5 -0.6 8.0 4.3 2020 1,788.0 — — — — 16.5
13.8
Operating Income % -13.0 7.2 8.0 15.7 2019 1,825.0 1,396.0 1,282.0 1,986.0 6,489.0
Earnings % -18.8 15.1 11.5 36.0 2018 1,965.0 1,641.0 1,512.0 2,381.0 7,500.0
2017 1,726.0 1,631.0 1,618.0 2,043.0 7,017.0 0.6
Dividends % 8.8 12.5 13.1 —
Earnings Per Share () -2.0
Book Value % 11.6 10.8 10.7 6.8
-6.6 -7.1
Stock Total Return % 65.1 11.2 26.4 22.6 2020 0.65 — — — —
2019 0.58 0.43 0.26 0.68 1.95 -14.9 -15.2 -16.6
2018 0.65 0.52 0.34 0.84 2.35
2018 2019 2020
2017 0.56 0.32 0.25 -0.77 0.36
© Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and ®
opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore is not an offer to buy or sell a security; are not warranted to be correct, complete or accurate; and
are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, ß
analyses or opinions or their use. The information herein may not be reproduced, in any manner without the prior written consent of Morningstar. Please see important disclosures at the end of this report.
Research Methodology for Valuing Companies

Qualitative Equity Research Overview intangible assets, switching costs, network effect, cost Our model is divided into three distinct stages:
At the heart of our valuation system is a detailed projection advantage, and efficient scale.
of a company's future cash flows, resulting from our Stage I: Explicit Forecast
analysts' research. Analysts create custom industry and Companies with a narrow moat are those we believe In this stage, which can last five to 10 years, analysts
company assumptions to feed income statement, balance are more likely than not to achieve normalized excess make full financial statement forecasts, including items
sheet, and capital investment assumptions into our globally returns for at least the next 10 years. Wide-moat such as revenue, profit margins, tax rates, changes in
standardized, proprietary discounted cash flow, or DCF, companies are those in which we have very high working-capital accounts, and capital spending. Based
modeling templates. We use scenario analysis, in-depth confidence that excess returns will remain for 10 years, on these projections, we calculate earnings before
competitive advantage analysis, and a variety of other with excess returns more likely than not to remain for at interest, after taxes, or EBI, and the net new
analytical tools to augment this process. We believe this least 20 years. The longer a firm generates economic investment, or NNI, to derive our annual free cash flow
bottom-up, long-term, fundamentally based approach profits, the higher its intrinsic value. We believe low- forecast.
allows our analysts to focus on long-term business drivers, quality no-moat companies will see their normalized
which have the greatest valuation impact, rather than short- returns gravitate toward the firm's cost of capital more Stage II: Fade
term market noise. quickly than companies with moats. The second stage of our model is the period it will take
the company's return on new invested capital—the
Morningstar's equity research group (“we," "our") believes To assess the direction of the underlying competitive return on capital of the next dollar invested ("RONIC")—
that a company's intrinsic worth results from the future advantages, analysts perform ongoing assessments of to decline (or rise) to its cost of capital. During the Stage
cash flows it can generate. The Morningstar Rating for the moat trend. A firm's moat trend is positive in cases II period, we use a formula to approximate cash flows in
stocks identifies stocks trading at an uncertainty-adjusted where we think its sources of competitive advantage lieu of explicitly modeling the income statement,
discount or premium to their intrinsic worth—or fair value are growing stronger; stable where we don't anticipate balance sheet, and cash flow statement as we do in
estimate, in Morningstar terminology. Five-star stocks sell changes to competitive advantages over the next Stage I. The length of the second stage depends on the
for the biggest risk-adjusted discount to their fair values several years; or negative when we see signs of strength of the company's economic moat. We forecast
whereas 1-star stocks trade at premiums to their intrinsic deterioration. this period to last anywhere from one year (for
worth. companies with no economic moat) to 10–15 years or
All the moat and moat trend ratings undergo periodic more (for wide-moat companies). During this period,
Four key components drive the Morningstar rating: (1) our review and any changes must be approved by the cash flows are forecast using four assumptions: an
assessment of the firm's economic moat, (2) our estimate of Morningstar Economic Moat Committee, comprised of average growth rate for EBI over the period, a
the stock's fair value, (3) our uncertainty around that fair senior members of Morningstar's equity research normalized investment rate, average return on new
value estimate and (4) the current market price. This department. invested capital, or RONIC, and the number of years
process ultimately culminates in our single-point star rating. until perpetuity, when excess returns cease. The
2. Estimated Fair Value investment rate and return on new invested capital
1. Economic Moat Combining our analysts' financial forecasts with the decline until the perpetuity stage is reached. In the case
The concept of an economic moat plays a vital role not firm's economic moat helps us assess how long returns of firms that do not earn their cost of capital, we
only in our qualitative assessment of a firm's long-term on invested capital are likely to exceed the firm's cost of assume marginal ROICs rise to the firm's cost of capital
investment potential, but also in the actual calculation capital. Returns of firms with a wide economic moat (usually attributable to less reinvestment), and we may
of our fair value estimates. An economic moat is a rating are assumed to fade to the perpetuity period over truncate the second stage.
structural feature that allows a firm to sustain excess a longer period of time than the returns of narrow-moat
profits over a long period of time. We define excess firms, and both will fade slower than no-moat firms, Stage III: Perpetuity
economic profits as returns on invested capital (or ROIC) increasing our estimate of their intrinsic value. Once a company's marginal ROIC hits its cost of capital,
over and above our estimate of a firm's cost of capital, we calculate a continuing value, using a standard
or weighted average cost of capital (or WACC). Without perpetuity formula. At perpetuity, we assume that any
a moat, profits are more susceptible to competition. We growth or decline or investment in the business neither
have identified five sources of economic moats: creates nor destroys value and that any new investment
provides a return in line with estimated WACC.
Morningstar Research Methodology for Valuing Companies Because a dollar earned today is worth more than a
dollar earned tomorrow, we discount our projections of
cash flows in stages I, II, and III to arrive at a total
present value of expected future cash flows. Because we
are modeling free cash flow to the firm—representing cash
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
weighted average of the costs of equity, debt, and preferred
stock (and any other funding sources), using expected
future proportionate long-term market-value weights.
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3. Uncertainty Around That Fair Value Estimate Morningstar Equity Research Star Rating Methodology
Morningstar's Uncertainty Rating captures a range of likely
potential intrinsic values for a company and uses it to
assign the margin of safety required before investing, which
in turn explicitly drives our stock star rating system. The
Uncertainty Rating represents the analysts' ability to bound
the estimated value of the shares in a company around the
fair value estimate, based on the characteristics of the
business underlying the stock, including operating and
financial leverage, sales sensitivity to the overall
economy, product concentration, pricing power, and
other company-specific factors.
Analysts consider at least two scenarios in addition to

their base case: a bull case and a bear case.
Assumptions are chosen such that the analyst believes
there is a 25% probability that the company will perform
better than the bull case, and a 25% probability that the
company will perform worse than the bear case. The
distance between the bull and bear cases is an
important indicator of the uncertainty underlying the
fair value estimate.
Our recommended margin of safety widens as our

uncertainty of the estimated value of the equity
increases. The more uncertain we are about the
estimated value of the equity, the greater the discount
we require relative to our estimate of the value of the
firm before we would recommend the purchase of the Morningstar Star Rating for Stocks The Morningstar Star Ratings for stocks are defined below:
shares. In addition, the uncertainty rating provides Once we determine the fair value estimate of a stock, we
guidance in portfolio construction based on risk compare it with the stock's current market price on a daily QQQQQ We believe appreciation beyond a fair risk-
tolerance. basis, and the star rating is automatically re-calculated at adjusted return is highly likely over a multiyear time frame.
the market close on every day the market on which the The current market price represents an excessively
Our uncertainty ratings for our qualitative analysis are stock is listed is open. pessimistic outlook, limiting downside risk and maximizing
low, medium, high, very high, and extreme. Please note, there is no predefined distribution of stars. upside potential.
That is, the percentage of stocks that earn 5 stars can
× Low–margin of safety for 5-star rating is a 20% discount fluctuate daily, so the star ratings, in the aggregate, can QQQQ We believe appreciation beyond a fair risk-
and for 1-star rating is 25% premium. serve as a gauge of the broader market's valuation. When adjusted return is likely.
× Medium–margin of safety for 5-star rating is a 30% there are many 5-star stocks, the stock market as a whole is
discount and for 1-star rating is 35% premium. more undervalued, in our opinion, than when very few QQQ Indicates our belief that investors are likely to
× High–margin of safety for 5-star rating is a 40% discount companies garner our highest rating. receive a fair risk-adjusted return (approximately cost of
and for 1-star rating is 55% premium. equity).
× Very High–margin of safety for 5-star rating is a 50% We expect that if our base-case assumptions are true the
discount and for 1-star rating is 75% premium. market price will converge on our fair value estimate over QQ We believe investors are likely to receive a less than
× Extreme–margin of safety for 5-star rating is a 75% time, generally within three years (although it is impossible fair risk-adjusted return.
discount and for 1-star rating is 300% premium. to predict the exact time frame in which market prices may
adjust). Q Indicates a high probability of undesirable risk-adjusted
4. Market Price returns from the current market price over a multiyear time
The market prices used in this analysis and noted in the Our star ratings are guideposts to a broad audience and frame, based on our analysis. The market is pricing in an
report come from exchange on which the stock is listed, individuals must consider their own specific investment excessively optimistic outlook, limiting upside potential and
which we believe is a reliable source. goals, risk tolerance, tax situation, time horizon, income leaving the investor exposed to Capital loss.
needs, and complete investment portfolio, among other
For more details about our methodology, please go to factors.
https://shareholders.morningstar.com.
?

Other Definitions quantitative report and the quantitative ratings, there is no Value Estimate, current market price, and the Quantitative
one analyst in which a given report is attributed to; Uncertainty Rating. The rating is expressed as 1-Star, 2-Star,
Last Price: Price of the stock as of the close of the market however, Mr. Lee Davidson, Head of Quantitative Research 3-Star, 4-Star, and 5-Star.
of the last trading day before date of the report. for Morningstar, Inc., is responsible for overseeing the
methodology that supports the quantitative equity ratings Q: the stock is overvalued with a reasonable margin of
Stewardship Rating: Represents our assessment of used in this report. As an employee of Morningstar, Inc., safety.
management's stewardship of shareholder capital, with Mr. Davidson is guided by Morningstar, Inc.'s Code of Ethics Log (Quant FVE/Price)<–1*Quantitative Uncertainty
particular emphasis on capital allocation decisions. Analysts and Personal Securities Trading Policy in carrying out his
consider companies' investment strategy and valuation, responsibilities. QQ: the stock is somewhat overvalued.
financial leverage, dividend and share buyback policies, Log (Quant FVE/Price) between (–1*Quantitative
execution, compensation, related party transactions, and Quantitative Equity Ratings Uncertainty, –0.5*Quantitative Uncertainty)
accounting practices. Corporate governance practices are Morningstar's quantitative equity ratings consist of:
only considered if they've had a demonstrated impact on (i) Quantitative Fair Value Estimate QQQ: the stock is approximately fairly valued.
shareholder value. Analysts assign one of three ratings: (ii) Quantitative Star Rating Log (Quant FVE/Price) between (–0.5*Quantitative
"Exemplary," "Standard," and "Poor." Analysts judge (iii) Quantitative Uncertainty Uncertainty, 0.5*Quantitative Uncertainty)
stewardship from an equity holder's perspective. Ratings (iv) Quantitative Economic Moat
are determined on an absolute basis. Most companies will (v) Quantitative Financial Health QQQQ: the stock is somewhat undervalued.
receive a Standard rating, and this is the default rating in (collectively the "Quantitative Ratings"). Log (Quant FVE/Price) between (0.5*Quantitative
the absence of evidence that managers have made Uncertainty, 1*Quantitative Uncertainty)
exceptionally strong or poor capital allocation decisions. The Quantitative Ratings are calculated daily and derived
from the analyst-driven ratings of a company's peers as QQQQQ: the stock is undervalued with a reasonable
Quantitative Valuation: Using the below terms, intended to determined by statistical algorithms. Morningstar, Inc. margin of safety. Log (Quant FVE/Price) >1*Quantitative
denote the relationship between the security's Last Price ("“Morningstar," "we," "our") calculates Quantitative Uncertainty
and Morningstar's quantitative fair value estimate for that Ratings for companies whether it already provides analyst
security. ratings and qualitative coverage. In some cases, the Quantitative Uncertainty: Intended to represent
Quantitative Ratings may differ from the analyst ratings Morningstar's level of uncertainty about the accuracy of the
× Undervalued: Last Price is below Morningstar's because a company's analyst-driven ratings can quantitative fair value estimate. Generally, the lower the
quantitative fair value estimate. significantly differ from other companies in its peer group. quantitative Uncertainty, the narrower the potential range
× Fairly Valued: Last Price is in line with Morningstar's of outcomes for that particular company. The rating is
quantitative fair value estimate. Quantitative Fair Value Estimate: Intended to represent expressed as Low, Medium, High, Very High, and Extreme.
× Overvalued: Last Price is above Morningstar's Morningstar's estimate of the per share dollar amount that
quantitative fair value estimate. a company's equity is worth today. Morningstar calculates × Low: the interquartile range for possible fair values is less
the quantitative fair value estimate using a statistical model than 10%.
Risk Warning derived from the fair value estimate Morningstar's equity × Medium: the interquartile range for possible fair values is
Please note that investments in securities are subject to analysts assign to companies. Please go to less than 15% but greater than 10%.
market and other risks and there is no assurance or https://shareholders.morningstar.com for information about × High: the interquartile range for possible fair values is
guarantee that the intended investment objectives will be fair value estimates Morningstar's equity analysts assign to less than 35% but greater than 15%.
achieved. Past performance of a security may or may not be companies. × Very High: the interquartile range for possible fair values
sustained in future and is no indication of future is less than 80% but greater than 35%.
performance. A security investment return and an investor's Quantitative Economic Moat: Intended to describe the × Extreme: the interquartile range for possible fair values is
principal value will fluctuate so that, when redeemed, an strength of a firm's competitive position. It is calculated greater than 80%.
investor's shares may be worth more or less than their using an algorithm designed to predict the Economic Moat
original cost. A security's current investment performance rating a Morningstar analyst would assign to the stock. The Quantitative Financial Health: Intended to reflect the
may be lower or higher than the investment performance rating is expressed as Narrow, Wide, or None. probability that a firm will face financial distress in the near
noted within the report. Morningstar's Uncertainty Rating future. The calculation uses a predictive model designed to
serves as a useful data point with respect to sensitivity × Narrow: assigned when the probability of a stock anticipate when a company may default on its financial
analysis of the assumptions used in our determining a fair receiving a "Wide Moat" rating by an analyst is greater obligations. The rating is expressed as Weak, Moderate,
value price. than 70% but less than 99%. and Strong.
× Wide: assigned when the probability of a stock receiving
Quantitative Equity Reports Overview a "Wide Moat" rating by an analyst is greater than 99%. × Weak: assigned when Quantitative Financial Health <0.2
The quantitative report on equities consists of data, × None: assigned when the probability of an analyst × Moderate: assigned when Quantitative Financial Health
statistics and quantitative equity ratings on equity receiving a "Wide Moat" rating by an analyst is less than is between 0.2 and 0.7
securities. Morningstar, Inc.'s quantitative equity ratings are 70%. × Strong: assigned when Quantitative Financial Health >0.7
forward looking and are generated by a statistical model
that is based on Morningstar Inc.'s analyst-driven equity Quantitative Star Rating: Intended to be the summary
ratings and quantitative statistics. Given the nature of the rating based on the combination of our Quantitative Fair
?

Other Definitions
Last Close: Price of the stock as of the close of the market

of the last trading day before date of the report.
Quantitative Valuation: Using the below terms, intended to

denote the relationship between the security's Last Price
and Morningstar's quantitative fair value estimate for that
security.
× Undervalued: Last Price is below Morningstar's

quantitative fair value estimate.
× Fairly Valued: Last Price is in line with Morningstar's
× Overvalued: Last Price is above Morningstar's
This Report has not been made available to the issuer of the
security prior to publication.
Risk Warning
Please note that investments in securities are subject to
market and other risks and there is no assurance or
guarantee that the intended investment objectives will be
achieved. Past performance of a security may or may not be
sustained in future and is no indication of future
performance. A security investment return and an investor's
principal value will fluctuate so that, when redeemed, an
investor's shares may be worth more or less than their
original cost. A security's current investment performance
may be lower or higher than the investment performance
noted within the report.
The quantitative equity ratings are not statements of fact.

Morningstar does not guarantee the completeness or
accuracy of the assumptions or models used in determining
the quantitative equity ratings. In addition, there is the risk
that the price target will not be met due to such things as
unforeseen changes in demand for the company's products,
changes in management, technology, economic
development, interest rate development, operating and/or
material costs, competitive pressure, supervisory law,
exchange rate, and tax rate. For investments in foreign
markets there are further risks, generally based on
exchange rate changes or changes in political and social
conditions.
A change in the fundamental factors underlying the

quantitative equity ratings can mean that the valuation is
subsequently no longer accurate.
For more information about Morningstar's quantitative

methodology, please visit
http://global.morningstar.com/equitydisclosures.
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21:46, UTC 21:00, UTC
General Disclosure
The analysis within this report is prepared by the person
(s) noted in their capacity as an analyst for Morningstar’s
equity research group. The equity research group
consists of various Morningstar, Inc. subsidiaries
(“Equity Research Group)”. In the United States, that
subsidiary is Morningstar Research Services LLC, which
is registered with and governed by the U.S. Securities
and Exchange Commission.
The opinions expressed within the report are given in

good faith, are as of the date of the report and are
subject to change without notice. Neither the analyst
nor Equity Research Group commits themselves in
advance to whether and in which intervals updates to
the report are expected to be made. The written analysis
and Morningstar Star Rating for stocks are statements the Report and are subject to change. While financial situation or particular needs of any specific
of opinions; they are not statements of fact. Morningstar has obtained data, statistics and recipient. This publication is intended to provide
information from sources it believes to be reliable, information to assist institutional investors in making
The Equity Research Group believes its analysts make Morningstar does not perform an audit or seeks their own investment decisions, not to provide
a reasonable effort to carefully research information independent verification of any of the data, statistics, investment advice to any specific investor. Therefore,
contained in the analysis. The information on which the and information it receives. investments discussed and recommendations made
analysis is based has been obtained from sources herein may not be suitable for all investors: recipients
believed to be reliable such as, for example, the The quantitative equity ratings are not a market call, must exercise their own independent judgment as to
company’s financial statements filed with a regulator, and do not replace the User or User’s clients from the suitability of such investments and recommendations
company website, Bloomberg and any other the conducting their own due-diligence on the security. The in the light of their own investment objectives,
relevant press sources. Only the information obtained quantitative equity rating is not a suitability experience, taxation status and financial position.
from such sources is made available to the issuer who assessment; such assessments take into account may
is the subject of the analysis, which is necessary to factors including a person’s investment objective, The information, data, analyses and opinions presented
properly reconcile with the facts. Should this sharing of personal and financial situation, and risk tolerance all herein are not warranted to be accurate, correct,
information result in considerable changes, a statement of which are factors the quantitative equity rating complete or timely. Unless otherwise provided in a
of that fact will be noted within the report. While the statistical model does not and did not consider. separate agreement, neither Morningstar, Inc. or the
Equity Research Group has obtained data, statistics and Equity Research Group represents that the report
information from sources it believes to be reliable, Prices noted with the Report are the closing prices on contents meet all of the presentation and/or disclosure
neither the Equity Research Group nor Morningstar, Inc. the last stock-market trading day before the publication standards applicable in the jurisdiction the recipient is
performs an audit or seeks independent verification of date stated, unless another point in time is explicitly located.
any of the data, statistics, and information it receives. stated.
Except as otherwise required by law or provided for in
General Quantitative Disclosure General Disclosure (applicable to both Quantitative a separate agreement, the analyst, Morningstar, Inc.
The Quantitative Equity Report (“Report”) is derived and Qualitative Research) and the Equity Research Group and their officers,
from data, statistics and information within Unless otherwise provided in a separate agreement, directors and employees shall not be responsible or
Morningstar, Inc.’s database as of the date of the Report recipients accessing this report may only use it in the liable for any trading decisions, damages or other
and is subject to change without notice. The Report is country in which the Morningstar distributor is based. losses resulting from, or related to, the information,
for informational purposes only, intended for financial Unless stated otherwise, the original distributor of the data, analyses or opinions within the report. The Equity
professionals and/or sophisticated investors (“Users”) report is Morningstar Research Services LLC, a U.S.A. Research Group encourages recipients of this report to
and should not be the sole piece of information used by domiciled financial institution. read all relevant issue documents (e.g., prospectus)
such Users or their clients in making an investment pertaining to the security concerned, including without
decision. The quantitative equity ratings noted the This report is for informational purposes only and has limitation, information relevant to its investment
Report are provided in good faith, are as of the date of no regard to the specific investment objectives, objectives, risks, and costs before making an
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reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.

21:46, UTC 21:00, UTC
investment decision and when deemed necessary, to currently covers and provides written analysis on
seek the advice of a legal, tax, and/or accounting • Neither Morningstar, Inc. or the Equity Research please contact your local Morningstar office. In
professional. Group receives commissions for providing research nor addition, for historical analysis of securities covered,
do they charge companies to be rated. including their fair value estimate, please contact your
The Report and its contents are not directed to, or local office.
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entity who is a citizen or resident of or located in any Group is a market maker or a liquidity provider of the For Recipients in Australia: This Report has been
locality, state, country or other jurisdiction where such security noted within this report. issued and distributed in Australia by Morningstar
distribution, publication, availability or use would be Australasia Pty Ltd (ABN: 95 090 665 544; ASFL:
contrary to law or regulation or which would subject • Neither Morningstar, Inc. or the Equity Research 240892). Morningstar Australasia Pty Ltd is the provider
Morningstar, Inc. or its affiliates to any registration or Group has been a lead manager or co-lead manager of the general advice (‘the Service’) and takes
licensing requirements in such jurisdiction. over the previous 12-months of any publicly disclosed responsibility for the production of this report. The
offer of financial instruments of the issuer. Service is provided through the research of investment
Where this report is made available in a language other products. To the extent the Report contains general
than English and in the case of inconsistencies between • Morningstar, Inc.’s investment management group advice it has been prepared without reference to an
the English and translated versions of the report, the does have arrangements with financial institutions to investor’s objectives, financial situation or needs.
English version will control and supersede any provide portfolio management/investment advice some Investors should consider the advice in light of these
ambiguities associated with any part or section of a of which an analyst may issue investment research matters and, if applicable, the relevant Product
report that has been issued in a foreign language. reports on. However, analysts do not have authority over Disclosure Statement before making any decision to
Neither the analyst, Morningstar, Inc., or the Equity Morningstar's investment management group's invest. Refer to our Financial Services Guide (FSG) for
Research Group guarantees the accuracy of the business arrangements nor allow employees from the more information at http://www.morningstar.com.au/fsg.pdf
translations. investment management group to participate or .
influence the analysis or opinion prepared by them.
This report may be distributed in certain localities, For Recipients in Canada: This research is not
countries and/or jurisdictions (“Territories”) by • Morningstar, Inc. is a publically traded company prepared subject to Canadian disclosure requirements.
independent third parties or independent intermediaries (Ticker Symbol: MORN) and thus a financial institution
and/or distributors (“Distributors”). Such Distributors the security of which is the subject of this report may For Recipients in Hong Kong: The Report is
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analyst, Morningstar, Inc. or the Equity Research Group. outstanding shares. Please access Morningstar, Inc.’s Asia Limited, which is regulated by the Hong Kong
In Territories where a Distributor distributes our report, proxy statement, “Security Ownership of Certain Securities and Futures Commission to provide services
the Distributor is solely responsible for complying with Beneficial Owners and Management” section https: to professional investors only. Neither Morningstar
all applicable regulations, laws, rules, circulars, codes //shareholders.morningstar.com/investor-relations/fin- Investment Management Asia Limited, nor its
and guidelines established by local and/or regional ancials/sec-filings/default.aspx representatives, are acting or will be deemed to be
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products and licenses, research and consulting Investment Management Asia Limited Licensed
• No interests are held by the analyst with respect to services, data services, licenses to republish our ratings Representative at http://global.morningstar.com/equi-
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– Morningstar, Inc. may hold a long position in the sponsorship and website advertising.
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in some cases restricted stock. For a list of securities which the Equity Research Group has not been the subject of any disciplinary action by
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21:46, UTC 21:00, UTC
SEBI or any other legal/regulatory body. Morningstar

Investment Adviser India Private Limited is a wholly
owned subsidiary of Morningstar Investment
Management LLC. In India, Morningstar Investment
Adviser India Private Limited has one associate,
Morningstar India Private Limited, which provides data
related services, financial data analysis and software
development.
The Research Analyst has not served as an officer,

director or employee of the fund company within the
last 12 months, nor has it or its associates engaged in
market making activity for the fund company.
*The Conflicts of Interest disclosure above also applies

to relatives and associates of Manager Research
Analysts in India # The Conflicts of Interest disclosure
above also applies to associates of Manager Research
Analysts in India. The terms and conditions on which
Morningstar Investment Adviser India Private Limited
offers Investment Research to clients, varies from client
to client, and are detailed in the respective client
agreement.
For recipients in Japan: The Report is distributed by

Ibbotson Associates Japan, Inc., which is regulated by
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recipients of this information.
For recipients in Singapore: This Report is

distributed by Morningstar Investment Adviser
Singapore Pte Limited, which is licensed by the
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investment product, taking into account their specific
investment objectives, financial situation or particular
needs, before making any investment decisions.
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Activision Blizzard Inc ATVI (XNAS)

Morningstar Pillars Analyst Quantitative Important Disclosure:

Activision Blizzard Inc ATVI (XNAS)

Activision Blizzard Inc ATVI (XNAS)

Activision is not as exposed to the mobile/tablet market

While much of the management team had been in place

While we still have some reservations around the $6

Activision Blizzard Inc ATVI (XNAS)

over year to $1.5 billion (versus guidance of $1.3 billion).

Activision Posts Strong Start to 2020; Call of Duty

Non-GAAP revenue for the quarter improved 30% year

Activision Blizzard Inc ATVI QQ 01 Jul 2020 02:00 UTC

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

Analysts consider at least two scenarios in addition to

Our recommended margin of safety widens as our

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

Last Close: Price of the stock as of the close of the market

Quantitative Valuation: Using the below terms, intended to

× Undervalued: Last Price is below Morningstar's

The quantitative equity ratings are not statements of fact.

A change in the fundamental factors underlying the

For more information about Morningstar's quantitative

Activision Blizzard Inc ATVI (XNAS)

The opinions expressed within the report are given in

Activision Blizzard Inc ATVI (XNAS)

Activision Blizzard Inc ATVI (XNAS)

SEBI or any other legal/regulatory body. Morningstar

The Research Analyst has not served as an officer,

*The Conflicts of Interest disclosure above also applies

For recipients in Japan: The Report is distributed by

For recipients in Singapore: This Report is

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