Gaming Industry Thrilling Investors

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

The gaming industry is facing cutthroat competition more than ever due to the console transition and competition from smartphones and tablets. Sales in this industry have remained flat in the last few years. However, now the industry has started showing positive signs.

According to Forbes, DFC intelligence reports have forecasted that the global market for video games will grow at a rate of 3.4% until 2017 and revenue will reach $82 billion as compared to $67 billion in 2012. Steady growth is expected in the PC and mobile gaming segment. The market players are striving to avail this favorable condition by implementing different strategies.

This article analyzes the separation of Activision Blizzard (NASDAQ: ATVI) from its parent company, Vivendi. The company took this step as it did not want to remain Vivendi's piggy bank. The following is a brief analysis of Activision and two competitors; Shanda Games (NASDAQ: GAME) and Electronic Arts (NASDAQ: EA).

Which growth strategies are being implemented?

Activision Blizzard has now become an independent company. It announced it will buy 429 million shares from the parent company, Vivendi, a French telecom and entertainment company holding 61% in Activision Blizzard. The deal is worth a total of $5.8 billion. This transaction will result in Activision now focusing on its core competency, and it will now be able to position itself as one of the lead gaming and entertainment companies. The management expects pro forma earnings per share accretion between 18% and 29%, on a GAAP basis.

Before the deal, Activision was holding considerable cash reserves and minimal debt, making it a substantial asset for the parent company. The company currently has more than $3 billion cash on hand, preserving its liquidity and financial stability. However, the transaction will raise the company’s net debt to approximately $1.4 billion.

On the other hand, it is expected that Activision’s new launches will increase its capacity to pay back the debt raised. The company is in the process of launching its much awaited Call of Duty: Ghosts and Skylanders: Swap Force. Both these games are expected to be blockbuster hits, despite the intense rivalry, and will consequently earn huge profits for the company.

The projected full-year 2013 GAAP revenue for the company is $4.31 billion, which is up by 2.1% compared to last year’s revenues. Diluted EPS is expected to be $0.77, which is 5.5% higher than the previous year’s per share earnings. These revenue and EPS numbers do not account for any effect of its recent transaction or its upcoming products. If we add these effects, then the projected EPS will be even higher than the stated figure.

What are its peers' game plans?

Shanda Games has announced it will acquire affiliates providing user and payment platform services from its parent company. The acquisition will help the company both strategically and financially. It will help Shanda establish its mobile platform, improve its cost structure and efficiently utilize its cash. Moreover, it will expand Shanda's customer base and accelerate revenue growth in its mobile games business. It will enable the company to become an integrated online gaming enterprise. The success of its launch of Million Arthur last week has also strengthened its mobile platform. After implementing these strategies, earnings per share are expected to improve by approximately 40%-50%.

The launch of the mobile game, Million Arthur, is bringing in strong earnings for the company. The game has become the third most grossing app across all Apple’s App Store in China following its beta test launch. 

On the other hand, Electronic Arts, the No. 1 publisher in the Western retail market, announced the worldwide launch of its new game, Iron Force. The game was launched last month in Russia where it proved to be a blockbuster. The game immediately secured a top position in the App Store charts. Since its launch, 1.5 million Iron Force matches have been fought. Hence, it is expected that the game will also outperform in the rest of the world’s markets and will be acclaimed by gamers.

The company is also going to launch online FIFA, one of the best selling games throughout the world, in China. New features and techniques have been added to this game. As the Chinese market provides one of the largest online gaming platforms, it is expected that this game will take the Chinese market by storm. Hence, it will bring huge profits for the company.

Final words

Activision Blizzard has a very healthy financial position with more than $4.6 billion cash on hand. The year-over-year changes for its first quarter revenue, earnings per share and free cash flow were 13%, 21% and 114%, respectively. This shows that the company’s performance has been outstanding in the previous quarter.

Activision's recent moves are expected to make its position even stronger. Its long-term plans, which include the development of Bungie’s Destiny and Call of Duty Online, are also anticipated to contribute potentially to the company’s good future. Based on this analysis, I would recommend the firm’s stock as a Buy.

Shanda’s financial performance has worsened in the first quarter compared to the earlier reporting periods. The gross profit and net income have declined by 20.7% and 27.9% year-over-year, respectively. The number of its average daily and monthly active users has also declined. But due to the launch of Million Arthur and its recent acquisition, the company’s future looks somewhat promising.

The financial performance of EA is satisfactory. Although its net revenue declined by 0.6% year-over-year, the net income has increased by 9.5%. The launch of Iron Force worldwide and FIFA online in China, will magnify the revenues of the company, enhancing its profitability and making the stock more attractive for investors. 

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usman iftikhar 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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