Game on, Activision

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

As an avid gamer, it feels special to write about a company that has been one of my favorite game developers.

Activision (NASDAQ: ATVI) is one of the biggest third party game developers in the world with titles like Call of Duty and World of Warcraft to its credit, making it one of the most successful game developers of all times.

Being a part of an industry that thrives on innovation and creativity, Activision with each successive intellectual property, or IP, tries to push the limits setting new standards in game designing, graphics and user gameplay.

The Call of Duty series, one of the most successful war franchisees of all time, is now gearing up for the launch of its latest addition to the series, “COD: Ghosts.” Considering the fact that COD is one of the most popular series, it will be a definite financial success for the company adding significantly to the company’s bottom line.

The company has done very well in 2012 with non GAAP revenue growing 11% year-over-year to reach $5 billion and an operating margin of 34%. Free cash flows improved to $1.2 billion, a 45% year-over-year increment, further solidify its balance sheet and putting the company in a stronger position to make strategic investments from time to time.

For 2013, the company is focused on acquiring new IPs and make planned investments that yield growth in the long term for the company. In this direction, the company, in partnership with Tencent, officially launched its free to play FPS Call of Duty online for PC in China.

Moreover, the company, in partnership with Bungie, developer of the famous halo franchise which essentially catapulted Xbox to the top of the charts, is working on their newest project, “Destiny,” which is the latest hot topic of discussion in gaming circles and is one of the most anticipated games for the next gen consoles.

2012 saw the company make windfall gains owing to a series of successful game launches, whether it is Diablo 3, which broke all records exceeding even the most optimistic estimates of the company, or the new expansion pack, Mists of Pandara, for the extremely successful World of Warcraft series. All of these significantly contributed to the company’s bottom line.

2013 marks the entry of the next phase in the video game market with the launch of next gen consoles PS4 and Xbox One. This creates both an opportunity as well as competition in a bid to establish itself and create video games that not only exploit the hardware potential of these machines but at the same time offer a compelling gameplay and storyline, which are critical to a game’s success.

The company estimates a drop in its top and bottom line figures on a year-over-year basis in fiscal year 2013 owing to the company’s plans for no significant game releases in the year and the transition to next gen consoles which will take time to penetrate the market as against the significant installed base the company enjoys at present.

Intense competition

There is no dearth of competition in the industry, and only those companies who are committed to constant innovation, retain talented game designers and program engineers and offer gamers a thrilling experience that blows their mind away survive.

Sony (NYSE: SNE) is the biggest name in the gaming industry. The Japanese company is the inventor of the famous Playstation gaming console which revolutionized the gaming industry, and, until the arrival of Xbox in the gaming market, had virtually no competitor in the gaming hardware industry.

The company also works on video game development through the various game studios it has acquired from time to time be it Guerrilla games, developer of the extremely successful Killzone series, sucker punch productions, developer of the Sly cooper and Infamous series, or Naughty Dog studios, developer of the extremely popular and game of the year award winner Uncharted series and the last of us which has set new standards in game design, graphics and gameplay.

Sony is a significant contender in the race to become the No. 1 video game developer in the world.

With the launch of PS4 in fall 2013 along with a strong set of games lined up for release, Sony sure knows how to engage the customers, and if E3 (the annual fair for gaming companies to showcase their upcoming products) is any indicator of that, the company surely has a head start over its arch rivals Microsoft and their next gen console, Xbox One.

Electronic Arts (NASDAQ: EA), the developers of the extremely successful Battlefield series, which directly competes with Activision’s Call of Duty series, is another major third party developer who owns, among others, the extremely successful FIFA franchise and various other sport simulations.

Fiscal year 2013 saw the company post decent performances with non-GAAP digital revenues up 36% year-over-year to $ 1.7 billion. The company saw its major franchise, Battlefield 3, generate over $120 million in revenue through the March quarter, and over $3.5 million subscriptions to date.

FIFA 13 was another success story for the company as it generated over $200 million in revenue, a 94% increase over FIFA 12.

Moreover, the company with its recent partnership with entertainment giant Walt Disney to develop and publish games on the extremely popular Star Wars series over a multi year time scale creates an amazing opportunity for the company owing to the strong fan following of the franchise.

All in all, EA looks poised for a steady and sustained growth in the coming times.

Foolish last words

DFC Intelligence, the renowned entertainment and video game industry research firm pegs the global gaming industry to reach $82 billion by 2017, offering significant opportunities for Activision in the medium term.

With the arrival of next gen consoles, increasing production budgets and improving technology the gaming industry is in a dynamic phase, and only those companies who change their strategies, aligning themselves with the evolving demands of the customers, and produce innovative and creative products that redefine consumer tastes will survive.

Activision finds itself fairly positioned in this transitional phase. With a strong balance sheet and an amazing and talented team of developers, the company looks set for a period of strong and sustained growth.

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Rashmi Singh has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. 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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