Ready to Play with Activision

I like to be in the know – I’m going to assume you do as well.  And I think that Activision (NASDAQ: ATVI) is something you should be enlightened about.  The company makes some darn good games that are just plain fun to play.  When StarCraft came out I loved it and played it with friends for months.  Based on personal experience and an in-depth analysis, I think the company is a solid buy.  I am going to cover three main areas that make Activisionattractive and then detail a few reasons that may make you have second thoughts.  From that point you can do some further analysis with a bit of an edge on your counterparts, and hey, maybe it’ll lead to you making a great stock choice!

First off Activision is well known and respected in the gaming industry.  This does not mean they are set in their ways but rather means that gamers know they make quality and long-lasting games  Some say that Apple (NASDAQ: AAPL) may infringe on their business but let’s get real.  Apple makes great games for the iPhone and iPad.  They make games that are lots of fun for very casual gamers and I am sure they will continue to do it successfully.  But for people who want an immersive experience with massive worlds and tens of thousands of other gamers to interact with – Activison has the solution and Apple doesn’t.  Activision has the world’s largest online multiplayer game in World of Warcraft, they developed a number of the record breaking Xbox games in the Call of Duty series and the extremely lucrative Guitar Hero packages, and have PC classics with cult like followings in StarCraft and Diablo.  Many of these games are still driving in solid revenue for the company.  They have successes on almost every gaming platform with a history of long staying power.

The second is that for their number one position in the gaming industry as well as their strong balance sheet and income statement, their stock seems to be very reasonably priced.  Both the company’s net income and profit margin have increased the past 4 years yet the price has held relatively steady.  The company has $3.5 billion in cash which allows it to put $650 million into developing new games and technologies like it did in 2011.  With a trailing P/E of 13.75 and a forward P/E of 11.82 the company is hard to call expensive.  In addition, and quite impressively, the company has basically no debt.  The company is extremely profitable and is pouring money into research to become more profitable while lowering costs.  Sounds like a recipe for success to me.

 

Third is that they already have lasting value and are working hard on future games which will be greatly successful in the long run.  The company has had fantastic success with subscription games and is trying to increase and replicate this success by incorporating systems in games where players can trade in game weapons and supplies for real world money.  There is already a large black market for this and they are simply capitalizing on this.  In addition and more important to milking their current successes, ATVI has some great and even “game changing” releases in the works.

They are releasing Diablo III, the 10-years-in-the-making PC title which has quite a bit of hype surrounding it and will be snapped up by the still loyal players of Diablo II.  Estimates for first year games sales are at 5 million and even if it only reaches a more conservative 4.5 million or so, at $60 retail per game, that will inject a huge amount of cash into the company for further game development.  Additionally they are innovating with games like Skylanders where ATVI sells small figurines which unlock features of the game which, importantly to shareholders, have very high profit margins.  The company has also gotten rights to develop the new Transformers games as well as the next installment of Call of Duty.  Finally the game that could be the biggest boon for ATVI is currently codenamed “Titan” and is still in the early development stage butaccording to COO Paul Sams it is “the most ambitious thing we’ve ever attempted…  And I feel like we have set our company up to succeed on that. We have some of our most talented and most experienced developers on that team.”

Now for a few negatives. Activision hasn’t moved much at all since 2009 and so what is going to make them move now?  Well to be blunt they might not move in the next six months.  So if you’re in it for the short term this may not be the stock for you.  The company has had a slight decline in its subscriptions to WoW over the past few periods which may indicate that the game is losing its sway over members – a bad sign for one of the most profitable segments of the company.  The competition is always searching for the next game which will let them overtake WoW or surpass the success of Call of Duty and this possibility cannot be completely ignored.  Finally the overall gaming industry has been down the last two years and this may roll over and impact ATVI in a more substantial way as time progresses.  Phew, glad I got all of that out of the way.

There has been a lot of Foolish discussion about Activision of late and I wanted to give readers a broad overview of the company – a jumping point from which to continue your research.  The company has a team with a history of innovation and success, some awesome looking games in the pipeline, loyal fans, and a rock solid financial foundation.  Though it may not sky rocket in the next few months I think this company has some potential and should be considered for anyone who wants a gaming stock with little obvious downside and great growth opportunities.

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