Don’t Worry; Activision Blizzard is still a Good Deal
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
How does one feel when going through mixed emotions? Simple. Like an Activision Blizzard (NASDAQ: ATVI) investor.
On one hand, the investor is fretting over the fact that the company’s majority stakeholder, Vivendi, which owns 61% of the gaming giant, is rumored to sell off its Activision stake in the open market if it doesn’t get a buyer. Vivendi is sea deep in trouble. Its stock price is skirting around 9-year lows, runs the risk of getting its debt ratings slashed, and recently fired its CEO. Hence, in a bid to restructure itself, Vivendi might dump Activision shares into the open market if the need arises.
Don’t empty your cartridge, take cover
The result: the Activision investor would get some nightmares as the stock starts plummeting when it goes up for sale. But you still need not worry. Fellow blogger Ken Johnson has your back covered if such a situation does arise. According to Ken, an Activision bull should buy put options to cover the downside that might arise in case the rumor turns into reality. And I completely concur with him.
Selling off your Activision stock on the basis of a rumor is certainly not prudent, especially when the company has just made an amazing move in a market that is worth billions.
The march to the Middle Kingdom
Activision is partnering with Tencent, China’s largest internet company, for expanding its visibility in the rapidly growing online gaming market in China. The two companies have entered into a multi-year licensing agreement through which Tencent will operate Activision’s blockbuster franchise, Call of Duty, in its online avatar in China. The game is being offered in a free-to-play format with in-game item sales being the revenue-generating mechanism.
So what?
This move on Activision’s part is nothing short of a home run. Tencent operates CrossFire, the most successful online game in China, which contributes a billion dollars to its top line every year, according to what Michael Pachter of Wedbush Securities told Bloomberg. Moreover, Mr. Pachter also opines that Call of Duty’s advent in China can bring in $500 million for Activision after the first year of sales.
Again, Activision’s choice of Tencent as a partner in its Chinese quest is yet another intelligent move. Tencent is the biggest player in the Chinese online gaming market, accounting for more than two-fifths of revenue. This a lot bigger than NetEase (NASDAQ: NTES), which operates Activision’s World of Warcraft franchise in the mainland and has a share of 15%. Hence, the choice of a bigger partner goes hand in hand with a cult game like CoD. And if Mr. Pachter’s predictions about CoD sales in China are true, the Activision investor will be laughing all the way to the bank.
The market and the players
The online gaming industry in China is in its boom phase. Industry watchers expect the industry to be worth around $16 billion in the next 3 years, growing at a rate of 25% annually. Tencent currently leads the market, with NetEase in second place. These two command almost 60% of the market, but there are others who are cashing in on the industry’s growth.
Shanda Games (NASDAQ: GAME) is mounting an organized challenge to the hegemony of the established players in the market. The company brushed aside estimates in the most recent quarter and has an impressive Triple-A strategy of pursuing growth initiatives. Apart from Shanda, there is Giant Interactive (NYSE: GA), which has not only seen its revenue and users jump at a rapid pace, but has also made its investors richer by 22% so far this year. Giant’s performance in its recently reported quarter was terrific to say the least. Even though the company didn’t release any major game or expansion pack, its revenue shot up by 26%. And Giant is looking to build upon its successes with a number of games in the pipeline.
Stay with Activision
Although Activision is venturing into a highly competitive and lucrative Chinese online gaming arena, I believe that the company has the right sort of games and a great reputation to succeed. Chinese players are quite addicted when it comes to online games, especially the first-person shooter ones. Hence, Call of Duty’s strong legacy, better graphics and gameplay will help Activision rake in solid revenue from the Middle Kingdom.
Apart from the company’s Chinese adventure, there are a host of other reasons why Activision looks like a solid pick. Combining them all, Activision Blizzard looks like a winner and investors should not flee because of a rumor. Moreover, Mr. Pachter says that a spin-off is the most likely option that Vivendi is going to take. If Activision is spun-off, the company’s stock will undoubtedly move according to its financial performance, regarding which I don’t have much doubt as long as it makes games like CoD, World of Warcraft, Diablo and builds on its Chinese presence.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and NetEase.com. 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. If you have questions about this post or the Fool’s blog network, click here for information.
