Will you heed the call?

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The new COD game made over $1 billion in 15 days, $500 million in the first 24 hours of sale at retail stores. Overall there have been over 22 million copies sold of Black Ops 2, according to VGChartz. That is more than the $400 million Modern Warfare 3 made the prior year in its first 24 hours of sale. It also took MW3 16 days to reach $1 billion in sales, and it took Avatar 17 days to make $1 billion in sales. NPD also reported that COD was the number 1 selling game in December this year (as it has been for the past several years). Activision Blizzard (NASDAQ: ATVI) has benefited nicely since the release, up over 25% since November. Activision also brings in a lot of money through DLC (downloadable content) sales, which has very high margins. On the Xbox you can buy a season pass for all the content for $50 (which I did, being the big COD fan I am) or buy them (4 in all) for $15 each. I play a lot of Call of Duty, so let me provide you some insight into how the DLC packages will be very successful.

DLC Packages and New Guns

The DLC packages bring in new game types in the Zombies (the other side of the multiplayer space), new maps for the multiplayer gameplay, and new guns. With each new addition a new gun will be brought in, with the first DLC bringing in a combination of an SMG and an assault rifle that was pretty popular. This is very big for Activision, because everyone wants "the best weapon." In all multiplayer games there are guns that are considered cheap or better than other weapons than give you an advantage. With each new DLC Activision adds a new gun to the multiplayer area, which is a big driver in gamers wanting to go out and buy the DLC. Electronic Arts Inc (NASDAQ: EA) did the same thing with Battlefield 3, by adding in new guns with each DLC (for most of them, for some they added new vehicles) and it worked great. I expect that COD DLC packages will outperform Wall Street expectations because gamers will want to have that extra advantage for their gaming. Call of Duty has a very competitive atmosphere and everyone wants to have a leg up on the competition. Activision knows this and is capitalizing on it.

DLC packages increase Activision's margins, as it is much cheaper to add on content to a game than to create one from scratch. At $50 a season pass, that means they practically are selling 2 copies of Black Ops 2. This means that even if they miss estimates on the number of Call of Duty games sold, they can still make it up from the DLC packages. This will increase both Activision's top and bottom line, primarily the bottom line due to the higher margins. It also gives gamers a reason to keep playing the game for longer as they wait for the new content to roll out. When Call of Duty Black Ops 2 came out with its first DLC, there was a spike in the number of users playing as everyone was excited about the new maps and the new gun. In first person shooters, one way to boost sales is to have gamers still playing your game when the next one comes out. That means that when the new game comes out, most of those players will go and buy the "upgrade". If you come out with a new first person shooter but nobody is playing your game anymore, it is hard to get those gamers to switch over if they are used to a different game. Call of Duty's plan to roll out 4 DLC packages over the course of the year will enable it to have a lot of gamers still playing by the time Fall comes around, boosting its sales.

Next-Gen Gaming and Diablo 3

Sony recently announced its PS4 system and the processing power it would bring to the table, which includes 8 gigs of Ram and an 8 core processor. Sony and Blizzard are also teaming up to offer Diablo 3 on the PS4. This will be huge for Blizzard, as it enables it to reach a whole new market of one of its bestselling games. On top of that, it will also be able to sell DLC's over the PS4 marketplace. Diablo 3 has sold over 10 million copies, and if it is on the PS4 that will at least add another 2 million. Nintendo recently released its Wii U system and now offers Call of Duty on its consoles, which will further increase COD sales as the Wii has very little to offer mature gamers. So far only 180,000 copies have been sold for the Wii U. I think this number will increase to at least 300,000 by the end of the COD cycle, as there is very little competition in the mature gaming space on the Wii U. Microsoft is also rumored to be in the works for a new Xbox system, which will come out this fall.

New consoles could help spur more game sales as developers are able to offer more content and better graphics/gameplay with the stronger processing power. EA's Battlefield 4 is going to be a next-gen game, slated to come out in 2014. Already Battlefield 3 has large maps, immersive gameplay, and destructive landscape (you can tear down walls and buildings), and with more processing power I would expect the destruction to get better and the graphics to look almost life-like. Call of Duty is rumored to be making their next game with a destructible landscape, because of how popular it was in BF 3 and BF Bad Company 2. With the release of the new consoles, I would expect both Battlefield and Call of Duty to continue to sell very well as the gameplay experience gets better and the amount of things to do increases. One of the big bear cases against Activision is that Call of Duty will get stale and they will lose their cash cow. Console refreshes, especially one as big as this, will enable the Call of Duty franchise to last longer and allows Activision to use the profits to build out new franchises, such as Titan (the replacement for WOW rumored to come out in 2014) or Skylanders. Skylanders has made Activision over $1 billion in revenue and offers Activision Blizzard a new series to build out and is geared towards a younger audience. This will allow them to sell games like COD to mature players, and games like Skylanders to those whose parents won't let them play COD yet.

Competition and Sales Figures

Activision does have some tough competition to contend with. Battlefield 3 has been a big success, both selling well and getting very good reviews. I would expect Battlefield 4 to clash head on with the Call of Duty release in 2014. It has sold 6.65 million units on the Xbox 360, 6.22 million on the PS3, and 2.33 million on the PC. Black Ops 2 has sold only 860,000 units on the PC, but dominates BF on the consoles. It sold 9.51 million on the PS3, 11.5 million on the Xbox 360, and 160,000 on the Wii U. Call of Duty is much more of a console game and will continue to dominate that space, but it should try and reach out to PC gamers, just as Blizzard reached out to console gamers with Diablo 3. Take-Two Interactive Software Inc (NASDAQ: TTWO) pushed back the release of Grand Theft Auto 5 until September, which is around the time Activision announces the new Call of Duty game. There is a lot of pent up demand for GTA 5, which can be seen by the 17.9 million views the second official trailer has, and the 32.2 million views the first one has on YouTube.

Take-Two is also releasing its new BioShock game this March. This spring is going to be hard for Activision, as it has to compete with Crisis 3, the new Gears of War game (exclusively for the Xbox, which is COD's number one selling platform), and the new BioShock. The next Call of Duty will have very little competition, however. With no Battlefield, Gears of War, or Halo being released, the only thing Call of Duty has to worry about is GTA 5. But, GTA 5 caters to a different type of gamer than COD; one who prefers solo play rather than competitive online play. Combined with the fact that the next COD is supposed to be running on the next-gen consoles, it looks like Activision's Fall is going to be very strong this year. Another plus for Activision is that the 2nd biggest console out right now (the Xbox 360 at 74.3 million units compared to PS3's 73 million units) is also Activision's number 1 selling platform for COD. Wii beats out the Xbox with 99 million units, and now that it is offering Call of Duty with little competition I would expect sales to marginally increase for Activision. 

Final Thoughts on Fundamentals

Activision has seen a sharp run up in its stock price and now trades at a PE (TTM) of 14.5 and at 1.5 times book value. Some may look at that run and say the stock is overvalued, but you have to look at Activision's track record to see that its' not. Activision has grown its EPS by 40% over the past 5 years and its revenues by 28% in that same time period. Back in Q4 2010 Activision Blizzard had a an EPS of 53 cents a share, and 62 cents in Q4 2011. As of the last quarter (Q4 2012) that was up to 78 cents a share. Activision is expected to keep growing its EPS by over 20% annually, and if it does a PE of 14.5 looks pretty cheap. Activision has no debts, pays out a 1.3% dividend (with a payout ratio of 17.82%), and has $4.375 billion in cash. That makes Activision's stock price about 27% cash. Combine that with an EPS growing at 20% and future catalysts ahead, like the release of Titan, its new MMORPG, or the update for StarCraft 2, and Activision still looks like a good buy. While ideally I would wait for a pullback in the stock before you buy in, in the long run Activision looks it is going to continue to outperform. I'm still bullish on Activision.

callumturcan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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