The video game industry is a cyclical one. Given Microsoft's (Nasdaq: MSFT ) relatively new Xbox 360 and two other console launches this holiday season -- the Nintendo Wii and Sony's (NYSE: SNE ) PlayStation 3 -- 2006 is known to be the start of something big for video game publishers such as Activision (Nasdaq: ATVI ) and its big-time rival Electronic Arts (Nasdaq: ERTS ) . Of course, again, the stress is on cyclical as we take a stroll down memory lane with Activision's results in 2006.
Activision's fiscal third quarter (the calendar fourth quarter) started things off with a bang. Well, it was kind of a negative bang, with investors not exactly liking what they heard from the video game publisher -- even though one would imagine they'd know these companies were in a cyclical trough (when new consoles are expected later in the year, and therefore many gamers are in a kind of holding pattern when it comes to investing in new games). Activision reported profit down 30% to $67.9 million, or $0.23 per share, although sales jumped 20% to $816.2 million. These results missed expectations and the stock got walloped on the news.
In the fourth quarter, Activision reported a loss of $9.2 million, or $0.03 per share, compared to a profit of $3.6 million, or $0.01 per share, in the same period the year before. Revenues decreased 7.7% to $188.1 million.
Investors liked what they heard about Activision's first quarter, despite the fact that it reported a net loss of $17.8 million, or $0.06 per share, wider than the loss of $3.6 million, or $0.01 per share, it reported in the same quarter the year before. However, it was less of a loss than expected. Revenues fell 22% to $188 million.
In Activision's most recent second quarter, it said that its sales decreased 15.4% on a year-over-year basis; it didn't release earnings information, since it may have to restate its results due to the current stock options probe. However, Activision said that it has five launches for the new Nintendo Wii, including Call of Duty 3 and Tony Hawk's Downhill Jam. It's worthwhile to note it also had $747.4 million in cash and no debt. (Check out our Fool on Call, which teases out interesting facts from Activision's second-quarter conference call.)
Off years are hard for video game publishers like Activision and Electronic Arts (both of which are Motley Fool Stock Advisor picks). Of course, there's been more and more investor exuberance as 2006 has worn on and investors see how exciting next year should be, considering many folks will be picking up those new consoles and the new games to go along with them.
What does the CAPS community think of this video game publisher?
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Activision
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CAPS Rating
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**** (out of five stars)
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Total Bulls
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469
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Total Bears
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17
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Bull Ratio
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97%
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Bear Ratio
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3%
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Data current as of Dec. 18, 2006.
With 97% of CAPS players believing Activision will outperform, that's just about unanimous optimism (and interestingly, its four-star rating beats that of its biggest competitor, Electronic Arts, which only has a three-star rating as of this writing).
Here's a recent bullish pitch from CAPS player gr8iml8, which probably reflects one general reason there is so much optimism for Activision right now:
"With all these fools waiting in line for PS3 and Wii, you don't think the future is bright for video game publishers? ATVI may wobble a bit short term, but the trend will be up for quite awhile. The new video game consoles will generate free publicity for Activision. The time is now to respond to The Call of Duty!"
Personally, I believe many of the biggest video game publishers stand to gain a lot, not only from the upswing in the console cycle right now but also from the increasing popularity of video games as entertainment choices just like television and movies. It stands to reason that 2007 will be an interesting one to watch as the console cycle swings in game publishers' favor.
Don't play games with further Foolishness:
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
Activision and Electronic Arts are
Motley Fool Stock Advisor
recommendations; as of this writing, the service has returned an average of 68.13% vs. 29.28% for the S&P. Microsoft is a Motley Fool Inside Value recommendation.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy was a whiz at Frogger.
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