Activision Blizzard (ATVI) $Millions, except where noted) 2019 6,387 Net Bookings IY Growth 2020E 7,345 15% 2021E 8,447 15% 2022E 9,714 15% 2023E 10,879 12% 2024E 12,185 12% 2025E 13,647 12% 2026E 15,012 10% 2027E 16,513 10% 2028E 17,834 8% 2029E 19,261 8% na EBITDA 2.204 2.956 3,400 3,590 4,804 5,284 5,971 2,576 35% 4,021 33% 4,504 33% 5,707 32% EBITDA Margin 35% 35% 35% 33% 32% 32% 31% 206 272 717 Cash Taxes Tax Rate 130 6% 237 8% 287 8% 402 10% 450 10% 480 10% 634 12% 685 12% 8% 8% 12% 0% 0% Cash NOPAT (Net Operating Profit after Taxes, Before D&A) 2,074 2,370 2,720 3,128 3,303 3,619 4,053 Cash NOPAT Margin 32% 32% 32% 32% 30% 30% 30% 0% I Growth 14% 15% 15% 6% 10% 12% -100% Activision Blizzard reports Net Bookings as the net amount of products and services sold digitally or sold in physically to retailers linduding license fees, merchandise and publisher incentives) Net Bookings are the same as Net Revenues, which are Revenues excluding or net of deferrals. Notice that these forecasts include significant assumptions: growth, profitability and tax rates. These forecasts assume continued double digit growth rate for many years and very little margin erosion. Do these forecasts appear bullish (optimistic), neutral or bearish (pessimistic) to you? More important corporate tay rates are currenthe 2104 at the cash tay rate of 50to EBITDA paid ba Activision in 2019 Activision Blizzard (ATVI) $Millions, except where noted) 2019 (623) -10% 2020E (588) 2021E (676) 8% Increase (Decrease) in Net Trade Working Capital Percent of Revenues Percent of Y/ Change in Revenues 2022E (486) -5% 2023E (544) -5% 2024E (609) -5% 2025E (409) 396 2026E (450) 2027E (495) 2028E (268) 296 2029E (289) 296 183 268 Capital Expenditures (Capex) Percent of Revenues Y Growth 116 2% 135 2% 143 296 165 2% 163 2% 205 2% 225 296 248 296 289 296 (533) (321) (381) (426) (205) INVESTMENTS (507) (453) "Note: INVESTMENTS here refer to cash flows whereas invested Capital is an item on the Balance Sheet Notice that the company is forecast to have no major investments in the final two years of this forecast. Does this seem (3) Calculate Unlevered Free Cash Flow We define this as an unlevered" free cash flow forecast because the analysis does not forecast incremental leverage and it's potential to raise the outlook for free cash flows. Unlevered Free Cash Flow - Cash NOPAT - Investments In these calculations, financial analysts refer to the "Firm'. A "Firm' is a generic reference to any business regardless of size, focus or legal structure. A Company has a legal status with the IRS, whereas a "Firm' is not regulated by the IRS. Activision Blizzard (ATVI) Millions, except where noted) 2022E 2023E 2026E 2027E 2028E 2029E 2019 2,581 UNLEVERED FREE CASH FLOW TO THE FIRM Percent of EBITDA YAY Growth 2020E 2,823 110 9% 2021E 3,253 110% 15% 3,448 101% 2024E 4,045 101% 10% 3,684 103% 7% 2025E 4,258 95% 5% 117% 0% 0% 0% 0% -100% (3) Use a discount rate to calculate the Net Present Value of the Free Cash Flow to the Firm (FCFF) Activision Blizzard (ATVI) $Millions, except where noted) 2022E 3 2026E 7 2027E 8 2028E 9 2029E 10 Year Unlevered Free Cash Flow Discount Rate Present Value of Unlevered Free Cash Flows 2019 0 2,581 10% 2020E 1 2,823 10% 2,566 2021E 2 3,253 10% 3,448 10% 2,591 2023E 4 3,684 10% 2,516 2024E 5 4,045 10% 2,512 2025E 6 4,258 10% 2.403 2,581 2,688 (3) Add the present value of the forecast cash flows to produce the Net Present Value (NPV). (5) Calculate the Terminal Value To calculate the Terminal Multiple (as detailed above), we first apply the Perpetuity Growth Method using the Weighted Average Cost of Capital (WACC) and the assumption for the long-term, stable perpetual growth rate in free cash flows. Weighted Average Cost of Capital (WACC) Long-term Perpetual FCF Growth Implied Terminal Multiple (Perpetual Growth Method) 9% 2% 14.6x Next, use the Terminal Multiple and multiply it to the exit year's Free Cash Flows to the Firm (exit year n is 10 in our example). Free Cash Flow, in Year 10 in this example) Terminal Value Finally, calculate the Net Present Value of the Terminal Value using the Weighted Average Cost of Capital (WACC). You are discounting by the WACC for yearn, the exit year. Net Present Value of Terminal Value (6) Use the NPV of the FCFF and the Terminal value to Determine a Target for Equity Value Per Share 17857 Net Present Value of Free Cash Flows to the Firm Net Present Value of Terminal Value Terminal Value Percent of Pre Finance Value PRE FINANCE VALUE + Net Cash - Other Commitments/Noncontrolling Interest EQUITY VALUE AT PRICE TARGET TARGETED EQUITY VALUE PER SHARE Average Shares Outstanding, Year-end 0% 17857 3,119 20,976 $26.49 792 The 52-week trading range for ATVI is $44.81 - $76.75, with the low achieved intraday during the pandemic in March 2020. The consensus price target among publishing analysts for ATVI is $78.73. If ATVI is currently trading at $76, do you believe ATVI's shares are attractive based on our DCF? Most positive investment recommendations, a "Buy rating, depend upon at least 15% upside potential. Activision Blizzard (ATVI) $Millions, except where noted) 2019 6,387 Net Bookings IY Growth 2020E 7,345 15% 2021E 8,447 15% 2022E 9,714 15% 2023E 10,879 12% 2024E 12,185 12% 2025E 13,647 12% 2026E 15,012 10% 2027E 16,513 10% 2028E 17,834 8% 2029E 19,261 8% na EBITDA 2.204 2.956 3,400 3,590 4,804 5,284 5,971 2,576 35% 4,021 33% 4,504 33% 5,707 32% EBITDA Margin 35% 35% 35% 33% 32% 32% 31% 206 272 717 Cash Taxes Tax Rate 130 6% 237 8% 287 8% 402 10% 450 10% 480 10% 634 12% 685 12% 8% 8% 12% 0% 0% Cash NOPAT (Net Operating Profit after Taxes, Before D&A) 2,074 2,370 2,720 3,128 3,303 3,619 4,053 Cash NOPAT Margin 32% 32% 32% 32% 30% 30% 30% 0% I Growth 14% 15% 15% 6% 10% 12% -100% Activision Blizzard reports Net Bookings as the net amount of products and services sold digitally or sold in physically to retailers linduding license fees, merchandise and publisher incentives) Net Bookings are the same as Net Revenues, which are Revenues excluding or net of deferrals. Notice that these forecasts include significant assumptions: growth, profitability and tax rates. These forecasts assume continued double digit growth rate for many years and very little margin erosion. Do these forecasts appear bullish (optimistic), neutral or bearish (pessimistic) to you? More important corporate tay rates are currenthe 2104 at the cash tay rate of 50to EBITDA paid ba Activision in 2019 Activision Blizzard (ATVI) $Millions, except where noted) 2019 (623) -10% 2020E (588) 2021E (676) 8% Increase (Decrease) in Net Trade Working Capital Percent of Revenues Percent of Y/ Change in Revenues 2022E (486) -5% 2023E (544) -5% 2024E (609) -5% 2025E (409) 396 2026E (450) 2027E (495) 2028E (268) 296 2029E (289) 296 183 268 Capital Expenditures (Capex) Percent of Revenues Y Growth 116 2% 135 2% 143 296 165 2% 163 2% 205 2% 225 296 248 296 289 296 (533) (321) (381) (426) (205) INVESTMENTS (507) (453) "Note: INVESTMENTS here refer to cash flows whereas invested Capital is an item on the Balance Sheet Notice that the company is forecast to have no major investments in the final two years of this forecast. Does this seem (3) Calculate Unlevered Free Cash Flow We define this as an unlevered" free cash flow forecast because the analysis does not forecast incremental leverage and it's potential to raise the outlook for free cash flows. Unlevered Free Cash Flow - Cash NOPAT - Investments In these calculations, financial analysts refer to the "Firm'. A "Firm' is a generic reference to any business regardless of size, focus or legal structure. A Company has a legal status with the IRS, whereas a "Firm' is not regulated by the IRS. Activision Blizzard (ATVI) Millions, except where noted) 2022E 2023E 2026E 2027E 2028E 2029E 2019 2,581 UNLEVERED FREE CASH FLOW TO THE FIRM Percent of EBITDA YAY Growth 2020E 2,823 110 9% 2021E 3,253 110% 15% 3,448 101% 2024E 4,045 101% 10% 3,684 103% 7% 2025E 4,258 95% 5% 117% 0% 0% 0% 0% -100% (3) Use a discount rate to calculate the Net Present Value of the Free Cash Flow to the Firm (FCFF) Activision Blizzard (ATVI) $Millions, except where noted) 2022E 3 2026E 7 2027E 8 2028E 9 2029E 10 Year Unlevered Free Cash Flow Discount Rate Present Value of Unlevered Free Cash Flows 2019 0 2,581 10% 2020E 1 2,823 10% 2,566 2021E 2 3,253 10% 3,448 10% 2,591 2023E 4 3,684 10% 2,516 2024E 5 4,045 10% 2,512 2025E 6 4,258 10% 2.403 2,581 2,688 (3) Add the present value of the forecast cash flows to produce the Net Present Value (NPV). (5) Calculate the Terminal Value To calculate the Terminal Multiple (as detailed above), we first apply the Perpetuity Growth Method using the Weighted Average Cost of Capital (WACC) and the assumption for the long-term, stable perpetual growth rate in free cash flows. Weighted Average Cost of Capital (WACC) Long-term Perpetual FCF Growth Implied Terminal Multiple (Perpetual Growth Method) 9% 2% 14.6x Next, use the Terminal Multiple and multiply it to the exit year's Free Cash Flows to the Firm (exit year n is 10 in our example). Free Cash Flow, in Year 10 in this example) Terminal Value Finally, calculate the Net Present Value of the Terminal Value using the Weighted Average Cost of Capital (WACC). You are discounting by the WACC for yearn, the exit year. Net Present Value of Terminal Value (6) Use the NPV of the FCFF and the Terminal value to Determine a Target for Equity Value Per Share 17857 Net Present Value of Free Cash Flows to the Firm Net Present Value of Terminal Value Terminal Value Percent of Pre Finance Value PRE FINANCE VALUE + Net Cash - Other Commitments/Noncontrolling Interest EQUITY VALUE AT PRICE TARGET TARGETED EQUITY VALUE PER SHARE Average Shares Outstanding, Year-end 0% 17857 3,119 20,976 $26.49 792 The 52-week trading range for ATVI is $44.81 - $76.75, with the low achieved intraday during the pandemic in March 2020. The consensus price target among publishing analysts for ATVI is $78.73. If ATVI is currently trading at $76, do you believe ATVI's shares are attractive based on our DCF? Most positive investment recommendations, a "Buy rating, depend upon at least 15% upside potential