Is Activision Blizzard’s Stock Price Ready for a Breakout?

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

Video game maker Activision Blizzard’s (NASDAQ: ATVI) third-quarter results didn’t spring any surprise. The company, as always, handsomely beat estimates, and raised its full-year outlook. But, uncharacteristically, the stock gained an “amazing” 2.34% in extended trading after the report. And, for a change, the company didn’t lowball its guidance this time and said that it expects a better fourth-quarter, driven by Call of Duty: Black Ops II.

Will This Change?

Activision investors would know what I’m talking about. Despite being a solid performer, Activision Blizzard’s share price has just failed to take off. The stock’s year-to-date decline is in high-single digits, even though it has trumped estimates each time in the three quarters reported so far. One could even blame the company’s management as they have a habit of lowballing guidance, which has taken some shine away from its results in the past.

Hence, management’s views on the third-quarter conference call should certainly come as a whiff of fresh air for Activision investors. But, does this mean that the stock will now show us some action? Well, ideally I would have expected the stock to gain momentum from this point onwards but I’m not going to bet the house on that since its Activision.

Rather, it will make sense to take a look at what would make the stock inch higher. In simpler words, let’s take a look at the various drivers that would drive Activision’s results.

Playing its Way to the Top

So far this year, Activision Blizzard has rode the success of Diablo III (which had attained the title of “fastest selling PC game ever”) and Skylanders, Activision’s latest addition that has already generated half-a-billion in revenue.

In addition, World of Warcraft, Activision’s most well-known franchise, managed to arrest the decline in the number of subscribers this time. The seven-year old franchise was bolstered by the release of the Mists of Pandaria expansion pack, which was released in the last week of the quarter. Mists of Pandaria added 2.7 million subscribers in its first week, taking the WoW gamer count to 10 million, up from 9.1 million in the second quarter.

Thus, WoW has entered the current quarter with momentum behind it, pointing towards more subscriber additions in the final quarter of the year. WoW makes for around 30% of Activision’s revenue and hence, it should contribute handsomely to its coffers in the December quarter.  

Get Ready, it’s CoD Time

But, the main attraction of the holiday quarter is Call of Duty: Black Ops II. Call of Duty has been one of Activision’s most famous franchises, and with the holiday period nearing, the game should probably set some records. However, CoD has a fight at its hand this time in the form of Halo 4, Microsoft’s (NASDAQ: MSFT) reincarnation of the abandoned game franchise after a hiatus of five years.

The latest offering from the stable of Microsoft Game Studios has opened to favorable reviews, and could give competition to CoD. However, Microsoft has released Halo only on the Xbox 360 so far. Thus, Call of Duty might not see too much defections as PC gamers would be picking up the Activision offering. Moreover, I believe that gamers go after marquee titles and usually end up buying the best titles available. It’s not like buying a smartphone where you choose Samsung or Apple, so presence of a competing title shouldn’t prove to be too much trouble.

Looking at Mobile

Also, Activision Blizzard is making advances into mobile gaming, which is a really good move. We have already seen the likes of Glu Mobile (NASDAQ: GLUU), a maker of mobile games, record consistent revenue games over the past couple of years. Despite being a small company, Glu has been working its way into smartphones and tablets around the world with its great games. Its titles consistently feature among the top grossers on both Android and iOS.

Hence, Activision Blizzard should probably do even better in this space with its expertise in developing compelling games. The company launched Skylanders Lost Islands and Skylanders Battlegrounds on the iOS platform late last month, and also launched Activate, a social platform for mobiles like that of OpenFeint. Activision intends to replicate the console experience on smartphones and tablets, and is steadily making moves towards attaining its mobile goals.

The Bottom Line

Everything is in place for Activision to put up another blockbuster quarter. World of Warcraft’s latest expansion pack has kicked off well; Diablo III is going strong and Call of Duty’s next installment is waiting in the wings. With such positivity, I hope that the stock will finally show some spine and start moving up, rewarding investors for their patience. Management did state that they are being cautious about 2013 due to macroeconomic conditions and console transition, but this looks like another lowballing measure as Activision has done well even in recessionary conditions in the past.

Fundamentally, Activision Blizzard is a solid company, and the best video game stock you can buy. The company has consistently grown its revenue and is a free cash flow generating machine. It has generated in excess of a billion dollars in operating cash for three years on the trot. In addition, it carries a dividend yield of 1.6%. The only thing lacking has been the stock price performance. And I sincerely hope that the company’s wholesome positivity will translate into stock appreciation this time.

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TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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