ESG Issues Keeps Hammering Activision Blizzard Shares

Activision Blizzard (ATVI) benefited from the coronavirus lockdown restrictions, driving top-line growth and share price appreciation throughout 2020, and arguably putting the firm in a stronger position than when it entered the pandemic. However, the firm's share price has fallen dramatically since July 2021 when the California Department of Fair Employment and Housing filed a wide-ranging workplace discrimination and harassment lawsuit against Blizzard. The lawsuit and subsequent allegations forced a number of resignations of senior executives and developers including then-Blizzard President J Allen Brack. The resignations and other issues forced Overwatch 2 and Diablo 4 launches to be delayed past 2022.

Activision Blizzard appeared to turn a corner in early November 2021, but a Nov. 16 story in The Wall Street Journal revealed that CEO Bobby Kotick knew about the previous allegations, protected executives from being fired or punished, and led in the poorly received initial response to the lawsuit and accusations. As a result, Kotick faced a revolt from some employees along with a backlash from gamers, business partners, and investors. While the board backed Kotick, we believe the best course to help Activision Blizzard move forward and unlock the value in its stock would be to replace Kotick.

Despite the issues, we maintain our narrow moat rating. We are lowering our fair value estimate to $92 from $97, reflecting not only the delay of the Overwatch 2 and Diablo 4 launches, but also the additional costs we expect will be needed to attract and retain development talent in the wake of the scandal. While shares appear attractive versus our $92 fair value estimate, we have assumed a relatively quick resolution (within the next year) of the ongoing issues with a new CEO as the cleanest path forward. If Kotick tries to hang on at all costs, significant value destruction could occur.