How to Trade This Gamer-Centric Company

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

When it comes to technology, it's very hard to find undervalued companies. Tech related companies are mostly driven by market hype and speculation, which is why their valuations are often on the extremes. However, a classic exception to this theory is Activision Blizzard (NASDAQ: ATVI). Its shares have risen by nearly 35% over the last six months, yet they appear to be undervalued with a forward P/E of 14. Its shares are trading near their 52-week highs, but I believe that its shares could still head north.

Black Ops II

This upside is mainly driven by three reasons. With months of waiting, amongst a growing fanbase, the launch of Black Ops II propelled its sales to record levels. Its latest edition raked in $1 billion in revenue in just 15 days, and it's featured among the top downloaded games even after six months of its release. As clear as it gets, Call of Duty has become one of the most successful franchises in the history of gaming.

But that was hindsight. Activision just unveiled a content pack for its latest Call of Duty. Its “Vengeance” pack is available for $15, which is around one third the price of the game itself. The pack features four multiplayer maps, a special gun and zombie add ons. With a huge fanbase of over 15 million gamers, Activision is estimated to rake in revenues around $50-$75 million, just from the sales of its multiplayer pack.

A new addition

The third reason is that Activision plans to launch its “Call of Duty: Ghosts” on November 5. For the last couple of months, gamers and investors have speculated that Activision won’t be able to retain its growth momentum. This is because Call of Duty has already delivered one of the best first person shooter, or FPS, experiences out there, and the franchise will have to come up with something completely new to interest new and existing gamers.

But one of Activision’s developers recently stated that Call of Duty’s upcoming “Ghosts” will have a dual screen gameplay. Apart from extended displays, the second screen will involve a secondary gameplay/story, which will keep gamers on their toes (most of the time). This seems like something new, and might give Activision an edge over its rival, Battlefield 4. Sounds like rising revenues!

To lure early birds, Activision is giving away a free map on pre-orders. The game is available for pre-orders at a price tag of $59.99.

More upside?

One more thing to consider is that Microsoft’s (NASDAQ: MSFT) Xbox One and Sony’s (NYSE: SNE) Playstation 4 will be available in the next few months. So, by the time these consoles become available, there will be only a handful of games to flaunt the full extent of their powerful GPUs. Since “Call of Duty: Ghosts” happens to be one of those few titles, the lack of variety should contribute to higher unit sales of “Ghosts.”

The management of Microsoft recently stated that it is eyeing 100 million lifetime unit sales of Xbox 360. But its Xbox One is expected to have over 300 million units in lifetime sales, which is far greater than the current users of Xbox and Playstation, combined. Even Sony revised its internal estimates recently, as restrictive policies in Microsoft’s Xbox, propelled the sales of Playstation 4.

Now that Microsoft has allowed offline gameplay and permits the playability of used games, its console has regained its popularity. However, it has certainly lost those early birds who shifted to Playstation 4 for its unrestricted gameplay. But that’s just speculation (and guesstimates), as both Sony and Microsoft are yet to come up with hard numbers.

According to fiscal year 2014 estimates, Sony is expected to sell over 10 million Playstation 4 units while Xbox One is expected to sell around 5 million units. But these are far lower than 2011 sales numbers wherein, Sony sold 14.1 million PS3 units and Microsoft sold 14.4 million Xbox 360 units. This is primarily because most of the games that will be released in 2013 and 2014 will be backwards compatible. This means that PS3 and Xbox 360 consoles can still handle the upcoming game titles, but probably at lower graphics settings.

How to proceed

The estimated slowdown in console sales will certainly hurt Sony and Microsoft. But regardless of which console is the winner, Activision stands to benefit due to its cross platform availability, and the absence of any significant competitive threats. I believe that the lack of new gaming titles in 2013 will most likely entice gamers to purchase Ghosts.

But, to be frank, I don't know whether Ghosts will be able to revolutionize the gaming experience. That's a big task to fathom, and companies have lost fortunes trying to find that golden egg. However, I'm confident that the market hype will push its shares north, at least until its reviews are out.

So I'd recommend a long position in Activision until the game is launched. Conservative investors can dump their positions just before the release of Ghosts. And well versed traders can hold onto their positions, and create a straddle to hedge out any rude surprises. Here's an explanation of how straddles work.

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Piyush Arora 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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