Why Activision Blizzard Is a Buy

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

The previous quarter's results of Activision Blizzard (NASDAQ: ATVI) were not exciting as the company recorded a decline in its revenue as well as earnings. Despite an understated performance, Activision looks set to perform better in the long run. We'll see why Activision has a bright future, but before that, let’s take a look at the factors which affected its quarterly performance.  

Quarterly performance
The company’s non-GAAP revenue came in at $608 million, a drop of 42.5% from the year-ago quarter. The drop in the top line was disappointing, but Activision did manage to marginally beat the consensus estimate of $606 million. In the preceding year, robust sales of Diablo III enhanced Activision’s revenue, but there was no such propelling factor in the reported quarter, which was the primary reason for the lower revenue.   

Coming to earnings, its EPS plummeted from $0.20 to $0.08, beating the consensus estimate of $0.06. Higher sales of Skylanders Giants and Call of Duty: Black Ops II mitigated the downward pressure caused, but it was still not enough to compensate for the heavy plunge in the year-over-year sales of Diablo III.  

Looking ahead
Taking into consideration that the gaming market is very lucrative, a few other big name companies will undoubtedly try their best to challenge Activision. In order to steer clear of these direct competitors, Activision is planning to increase its marketing budget. Even though the increased expenditure will reduce Activision’s income for the next quarter, it will benefit the company in the long run by helping it to boost its sales, and also by helping it to tackle weak economic conditions.

The robust performance of Activision’s titles like Call of Duty and Skylanders may help the company offset the negative impact of the increased marketing expenditure, but even if it doesn’t, there are a couple of solid plans that the company has got in store for the future, which will definitely ramp up its sales.       

First, Activision is developing an online version of Call of Duty with Tencent, hoping to gain traction from the Chinese online gaming market. Given the gigantic size of China’s online gaming market and the popularity of the game, it is almost certain that Activision’s partnership with Tencent will be beneficial.

Second, Xbox 360 and PlayStation 3 versions of Diablo III are set to be launched in September, and given the stellar performance of this title in the preceding year, one can expect it to deliver similar results in the future. Also, bearing in mind that the console market is more prominent than the PC gaming market, it wouldn’t be surprising if console sales of Diablo III outnumbers its PC sales.

Lastly, Activision has also agreed to pay Vivendi $5.8 billion, which will make it an independent company once again. This share buyback will consume a lot of Activision’s money, but with the launch of Xbox One and unveiling of PlayStation 4, it is the right time for Activision to be set free as it looks to make the most of the upcoming console cycle.  

Other players
Electronic Arts (NASDAQ: EA) has performed inconsistently since the recession. In the previous quarter, Electronic Arts reported a loss of $0.40 per share, $0.22 less than the consensus estimate, while its revenue increased 0.8% to $495 million, well ahead of the analyst estimate of $460 million. The strong sales of popular games like Battlefield 3 and FIFA 2013 helped the company increase its revenue.

As for the future, the company has authorized the $500 million share buyback, which indicates that it is determined to return value to its shareholders. Further, Electronic Arts is also targeting the online Asian gaming market and has struck up a partnership with Tencent in China and Nexon in Korea, and is planning to release an online version of best-selling games like FIFA and Battlefield.

Take-Two Interactive (NASDAQ: TTWO)like its rivals, has also struggled to increase its earnings as the company reported a net loss of $62 million in the previous quarter. On the bright side, the company’s loss was largely reduced as compared to last year, when it was $111 million.  

Take-Two is trading at its highest price since the recession, and analysts expect the impending launch of Grand Theft Auto V, NBA 2K14, and WWE 2K14 to further propel the company’s share price.

Also, banking on the past success of Grand Theft Auto, the company has decided to release an online version of this title and analysts expect it to increase its sales in the future. Adapting to the trend of player-generated content, Take-Two has made an interesting addition to the Grand Theft Auto franchise, which will give the players access to an in-game editor, allowing them to craft content and share it with other players.   

Activision's revenue suffered in the previous quarter, but that was primarily a result of a drop in Diablo III sales, which was expected. But the company is making smart moves by introducing the online version of its popular Call of Duty game in a market such as China where online games are very popular. The upcoming console cycle should also lead to better revenue as gamers go out to purchase new games for their new consoles. So, investors shouldn't panic and continue holding their Activision shares as the future looks bright.

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Ayush Singh 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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