Activision Blizzard: A Solid Play This Year
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The online gaming industry is a huge business. It is growing as people can now play those games on new smart phones, tablets, and other wireless devices. Unfortunately those devices can’t yet run full versions of many of the larger games. The cost of entry into the industry is low because all a person needs is knowledge, a computer, and an idea. I will talk about why I think Activision is unnecessarily cheap and what it has to do going forward to continue to be a good stock to buy and hold.
Some of the largest players in the video game industry are Activision Blizzard (NASDAQ: ATVI) with a $14 billion market cap, Electronic Arts (Nasdaq: EA) with a $5.5 billion market cap, Take-Two Interactive Software (NASDAQ: TTWO) with a $1.4 billion market cap, and Konami (NYSE: KNM) with a $3.7 billion market cap.
Activision has a great balance sheet with $3.5 billion in cash and no debt and it generates almost a billion a year in free cash flow. It has another full year of hot releases coming out according to a Forbes article. It will be releasing Diablo 3, Call of Duty Black Ops 2, and then there will be expansions for World of Warcraft and Starcraft 2. It notes that Diablo 3 will have a real money item auction that Activision will get a percentage of sales from. This will continue the trend of people paying cash for online gaming items to improve their characters.
In its 2010 annual report Activision mentioned that the World of Warcraft: Cataclysm expansion last year sold 4.7 million units in the first month. Of that, an unprecedented amount were distributed digitally. This means a greater percentage of the revenues going right to Activision and it gets the games out to the players faster. Starcraft 2 sold 3 million units in its first month and just over 4 million in the five months it was on the market for 2010. I think the following of Starcraft fans is similar in size to Diablo fans and think we should see similar numbers for Diablo 3. In fact, since its slated to release in March, I think the five million unit mark that analysts are projecting will be made easily. And when that happens look for the stock to jump at the end of the year. Activision has established its two franchises in Call of Duty and World of Warcraft. These games generally market to different types of consumers so they won’t erode from each other’s sales as much.
Activision’s largest competitor is Electronic Arts. EA’s game franchises are Madden NFL and other sports games, Battlefield and The Sims. It also recently launched Star Wars: Old Republic that EA called the “fastest growing subscription MMO in history” on its latest conference call. Old Republic could steal players from World of Warcraft as it is a very similar crowd that plays them both. EA didn’t try a pricing war to lure subscribers either. Currently the game prices and the monthly subscription rates are the same. Activision however allows players to download a basic starter copy and play up to level 20 for free to help lure players in. I think The Old Republic will see some WoW defectors because it is newer and there hasn’t been a Star Wars MMORPG before. EA has recognized that platform gaming may take a hit from smart phone and tablet gaming. The core business will stay on PCs and video game platforms because the iPad can’t yet run a Diablo or Battlefield 3. In August of this year EA acquired PopCap Games Inc as reported in its latest 10-Q. EA knows that the biggest growth right now is from selling mobile games; something that a person can download on their phone or tablet while waiting for a plane or during a boring work meeting. Acquiring PopCap will help it quickly capitalize on that market. Activision has yet to make a big presence in mobile gaming. If EA can get in quick and establish good games that attract a loyal following, it may be difficult for Activision to steal away those customers.
Take-Two makes games under is Rockstar Games and 2K labels. Rockstar is known for its Grand Theft Auto series. Take-Two at this time isn’t really a major player in the MMORPG market but it is working on developing its mobile gaming presence. It already has agreements to be able to develop applications for the iPhone. Take-Two has been focused on growing its major games and keeping loyal customers happy. Many of its games are more platform based and could provide a barrier for Activision if it wanted to enter the platform market.
Konami is another competitor already working on establishing its mobile and social gaming presence. While its video game segment is the smallest of its segments, it understands the social gaming trend. Its game franchises consist of Metal Gear, Silent Hill, Frogger, and Contra. None of these even combined equal some of those from Activision or EA, but they are older games that many people know. According to its latest quarter results release, of its 14 million gaming customers for its digital gaming segment, the smallest group is from the Americas, the largest is in Japan and then Europe is second. Konami is another company that could hurt Activision’s chances at breaking into the mobile gaming market by establishing a dominate position before Activision can get games to the market.
Activision going forward has its key games with established and loyal customers. I think the fact that Activision just started paying a dividend last year shows that the board had realized that its days of big growth are slowing and now it needs another way to attract shareholders. Activision needs to look at developing a mobile gaming presence because I think that’s where most of the gaming industry growth is going to come from in the near future. It could look to buy up a company similar to EA’s buying PopCap; and I think that would be best for them because it would hopefully already provide established games with loyal followers. A company like glu.com would give it access to social gaming or Rovio Entertainment would give it mobile gaming. There are hundreds out there, so picking the right one would be the challenge. But it could take its gaming ideas with the development talent at the acquired company to develop new hit games.
I think Activision is undervalued here and solid dividends play. This is a good buy in point and shares should grow once Diablo 3 is released and after it can report the revenues obtained from the online auction house. As long as WoW subscribers doesn’t drop too much, shares could be back to the $15 mark by the end of 2012.
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