Massive Sales, Why Is This Game Maker Unloved?

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

Call of Duty, developed by Activision Blizzard (NASDAQ: ATVI), has been one of the best-selling video game franchises of all time. Each and every release had shattered previous records. Call of Duty Black Ops 2, the latest installment in the series, so far has achieved more than a Billion dollars of revenue. So the question is, if Call of Duty has been so explosively successful why has Activision Blizzard's stock performance been so lousy?

Call of Duty is a First Person Shooter game. The first game in the series was released in 2003 and was originally just for the PC. The earlier games were all set in WW2, but in 2007 Call of Duty 4 Modern Warfare was released and took the series outside the WW2 setting. Modern Warfare also elevated the series to another level with its enhanced online game-play and use of the new 7th generation console capabilities, bringing us the Call of Duty we know today and love.  

Other than being a great game, Call of Duty has been a huge financial success. The newly released Black Ops 2 is the best-selling game of all time. Its first day release numbers shattered other top selling video game Franchises such as Take Two Interactive's GTA IV and Microsoft's (NASDAQ: MSFT) Halo 4. 

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Not to mention that each new version of Call of Duty has been more successful than previous releases. Take a look at this comparison between the newly released Call of Duty Black Ops 2 with the original Call of Duty Black Ops released in 2010.

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With the above results you would expect Activision to have had a stellar run, so I was surprised to see this stock performance since 2008.

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ATVI data by YCharts

So why such the bad performance?

The Vivendi Cloud 

Vivendi (NASDAQOTH: VIVHY) acquired 61% Activision in 2007 for $4 Billion and merged it with Vivendi Games which included Blizzard Entertainment making Activision Blizzard, the world's largest pure video game publisher.  

Vivendi is strapped for cash and loaded with debt, so much that it has been getting in trouble with the rating agencies as of late. Although Activision has been one of Vivendi's best performing businesses, Vivendi considers Activision a non-core asset and last summer has been looking for a suitor for it's now $8.2 Billion stake. It failed for months to attract a bidder even with the help of esteemed Investment Banks such as Goldman Sachs and even after reducing its premium from 20% to 12%. A rumor emerged that Vivendi might sell its 61% stake on the open market, a move that would have a devastating effect on the share price.

Vivendi backed out of its plans in August, however in September it stated that it has not ruled out a sale of its majority stake in Activision Blizzard and such a deal is still under consideration. Vivendi has over $15 Billion in net debt and a sale of Activision Blizzard could provide Vivendi with over $8 Billion dollars to try to get its house in order.  

World of Warcraft Worries:

Call of Duty may be a big success for Activision Blizzard, but the Massive Multiplayer Online Role-Playing game World of Warcraft that came along with the Blizzard merger is Activision Blizzard's most prized possession. The game has over 10 million players which pay an average monthly subscription fee of $10. That is more than $1,200,000,000 of revenue per year which carries very high margins much higher than Call of Duty and other titles.

World of Warcraft has been around since 2004 and investors are worried that the passage of time will dwindle the number of subscribers to this immensely profitable title as with other things in life, but especially video games that have come of age.

There have also been releases of other free-to play MMOs such as Guild of Wars 2 and League of Legends. League of Legends is currently the biggest Massive Multiplayer Online game in the world with over 32 million registered players, 3 times more than World of Warcraft, and Guild Wars 2 which was released earlier this year has been praised by many and is seen as a significant threat to World of Warcraft.

These risks related to World of Warcraft are highlighted the threats section in the company’s filings:

"Subscription revenues from this game comprise a significant portion of our consolidated revenues. A number of software publishers have developed and commercialized, or are currently developing, online games for use by consumers over the Internet which pose a threat to the popularity of World of Warcraft, and we expect new competitors to continue to emerge in the MMORPG category. If consumer demand for World of Warcraft games declines and we have not introduced new MMORPG or other products that replace World of Warcraft’s potentially decreasing revenue, or added other sources of revenue, our financial condition could suffer."  

World of Warcraft shed 1.1 million subscribers in the second quarter of this year only to regain them again in Q3 probably due to the Mists of Pandaria Expansion Pack release. However this shows how fast the tides can turn when 10% of subscribers can be lost in 3 months. Just recently Star Wars The Old Republic by Electronic Arts (NASDAQ: EA) shed more than 25% of its users in 6 months and was forced to switch from charging a subscription fee to free-to-play. If World of Warcraft is ever forced to forgo the monthly subscription fee due to competition it would have a significant effect on Activision Blizzard's bottom line.

Flat Top Line:

Stock prices are heavily affected by incremental growth, and while each subsequent release of Call of Duty has been more successful than the past one, the overall top-line revenues for Activision Blizzard have been flat for the past 4 years

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Consoles are OUT, Mobile is IN:

Activision Blizzard has heavy exposure to consoles and PCs and public companies related to these two areas have been having a hard time right now. In fact Activision Blizzard has been one of the best performing Pure Gaming publishers in the last 10 years gaining over 200% in comparison to a 58% decline for EA and a 97% decline for THQ

If you have been investing in the stock market for a while you know that stock prices are heavily affected by the Buzz around both the company and the industry that it operates in. When investors are wildly optimistic about a company and the industry, it is rewarded with high valuations and vice versa.

To illustrate this fact, earlier this month a company called SolarCity had a hard time with its IPO due to the dismal performance and high profile bankruptcies of clean tech companies and solar panel manufacturers such in particular such as First Solar and the now bankrupt Solyndra. It was forced to go public at $8 per share instead of the $14 it was aiming for. This, even though SolarCity's business model is entirely different and actually benefits from the slump in solar panel prices.   

Currently investors are quite pessimistic regarding consoles and PCs and they are more upbeat about tablets and smartphones. Activision Blizzard might have generated more excitement if it had sold a Billion dollars’ worth of an App rather than an old fashioned console game.

Even legendary console maker and video game company Nintendo (NASDAQOTH: NTDOY) tried to capitalize on this trend by its recent release of the Wii U which is strikingly similar to a tablet rather than a traditional console; It's off to a rocky start though.

However Fellow Blogger Jason Hall expects that Activision will be able to capitalize on the trend of tablet gaming and adapt as he describes in his article. He expects tablets and smartphones to eventually evolve and catch up to Activision's games such as laptops did.

He writes: 

"As processing power and storage capacity increases, along with the ability to easily connect your device to a larger screen and input device, more complex and enriching gaming options will become available on the tablet and smartphone.  And you can bet the farm (or at least a cow or two) on ATVI being at the leading edge of that occurrence."

Foolish Bottom Line

The Legendary Peter Lynch advised investors to buy what they know and companies whose products they are familiar with and love. This philosophy led him to make great investments such as The GAP way back in the day which his teen daughters loved. However, Peter Lynch also said that the Devil is in the Details and advised reading the footnotes of a company's 10K. A good place to always check out before making an investment decision is the Risks and Threats disclosure section of a company’s 10K and 10Q. 

So, just because each release of Call of Duty is qualified for the Guinness Book of Records and you can't stop playing it doesn't automatically mean that the company behind it is a good investment. Digging deeper into a company's filings to truly understand the business is always advisable.



Pirlo0o has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. 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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