A Solid Quarter and a Solid Pipeline, but Still Waiting on the Stock Price

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

If there’s one game publisher that’s capable of putting up strong numbers on a regular basis, it’s Activision Blizzard (NASDAQ: ATVI). The company recently released its second quarter results, soon after rival Electronic Arts (NASDAQ: EA) released its own report.

Electronic Arts saw its top line shrink and loss widen from the year-ago period, but nevertheless it beat on bottom line and reported a lower than expected loss. However, the stock jumped almost 6% as management put some weight behind it in the form of a $500 million buyback.

In contrast, Activision’s quarter was a better one, but the stock stayed true to its doggedness and trended on the negative side in pre-market trading as World of Warcraft subscribers dwindled and the company provided a glum outlook for the current quarter.

However, things aren’t as ugly as one might think, and Activision Blizzard is still a better bet than Electronic Arts. Mr. Market might punish a stock for the smallest of mistakes, but we need to go beyond this myopia and look at a stock from a long-term perspective.

The quarter – wow, but no WoW

Revenue jumped an astounding 51% from last year to $1,054 million (non-GAAP), crushing both the company’s and the Street’s expectations handsomely, while non-GAAP earnings doubled to 20 cents a share. But investors were looking eagerly at how World of Warcraft fared in the quarter, and they didn’t like what they saw. Subscriber count went down 1.1 million (or 11%) sequentially, which is quite a hit considering it makes almost 30% of Activision Blizzard’s revenue.

Another army of Orcs is on the way

But, there’s nothing that can’t be fixed and Activision Blizzard has a fix for the World of Warcraft pain on the way. The company is slated to launch World of Warcraft: Mists of Pandaria, the next expansion pack of the franchise, on September 25. This would probably infuse some life into the seven-year-old game and attract those players who went away back into Activision Blizzard’s fold. And as Mists of Pandaria would be launched pretty late in the quarter, Activision Blizzard might lose some more subscribers in the current quarter before the expansion pack arrives, which might be one of the reasons of the poor outlook.

Beyond Warcraft’s World

However, we need to focus on other aspects as well, especially the game which drove the company’s revenue north. Diablo III, launched by Activision Blizzard in May has been selling like hot pies. The game achieved the title of “fastest selling PC game ever” and sold over 10 million copies in the quarter. Also, the company’s three games, namely Skylanders: Spyro's Adventure, Call of Duty: Modern Warfare 3 and Diablo III occupied the top three slots in North America and Europe in terms of copies sold in the first half of the year. Moreover, Activision Blizzard expects Diablo III’s terrific performance to continue in the second half of the year.

In addition, the company has a number of catalysts that are expected to drive its top line higher. Apart from Mists of Pandaria, the company is set to launch Skylanders Giants and Call of Duty: Black Ops II later this year. The previous iterations of both these games have met with astounding success and might do the same going forward. The Call of Duty franchise needs no introduction and has been an outrageous success for the company.

CoD in China

Also, Activision Blizzard had made another intelligent move last month. It introduced Call of Duty Online in China in association with Tencent. Tencent operates CrossFire, the most successful online game in the country. As a result, it seems that Activision’s decision to go with Tencent was a masterstroke instead of NetEase (NASDAQ: NTES), which operates World of Warcraft in the country. Tencent is a far bigger player than NetEase in the online gaming market in China, which lends further credence to Activision’s decision. Online gaming in China has been growing at a very fast rate and is expected to be as worth more than $9 billion in the next two years. Hence, the launch of CoD Online in China is certainly a good move on Activision Blizzard’s part.

Beyond the hurdles

But then, there might be a few concerns regarding Activision Blizzard. You might think that its lowly forecast for the current quarter signals towards more declines in WoW subscribers. But as I told you earlier, once the next expansion pack is released, the game would probably paint a better picture towards the back-end of the year.

Also, Activision Blizzard is known quite well for low-balling when it comes to the guidance. It had guided below the Street’s expectations for the second quarter as well but blew past expectations.

Next, the cloud of uncertainty regarding what Vivendi, which holds a 61% stake in Activision Blizzard, might do with its shares in the company. An open-market sale would weigh heavy on the stock but I believe setting up a defensive position would be a better idea than shying away from the stock.  

The stock price curse

Activision Blizzard has been in terrific form this year, trouncing the Street in both quarters reported so far. Its pipeline for the remainder of the year is pretty strong and the foray of CoD in China is another positive. However, the stock has a history of displaying dog-like characteristics and I believe too much focus on World of Warcraft numbers and the Vivendi episode has led to a poor stock price performance this year.

But, Activision is undoubtedly the best in its league as far as stock price performance is concerned so far this year, and that too with a dividend yield of 1.5%. You could have done worse by picking a stock like Electronic Arts, Zynga or Take-Two Interactive that are deeply into the red. This is one of the reasons why I’m initiating an outperform CAPS call on Activision Blizzard and hope that the stock’s performance catches up with its strong numbers. 


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.

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