Foolish Forecast: Can Activision Rock This Joint?

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Tomorrow night, it's time for a second-quarter earnings report from video game producer Activision Blizzard (Nasdaq: ATVI). Its first quarter sounded great, but times have definitely changed. The company sports some of the biggest names in the business, but is that enough to create profits in troubled times?

What Fools say:
Here's how Activision's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Microsoft (Nasdaq: MSFT)	$205.5	12.2	***
Nintendo (Pink Sheets: NTDOY.PK)	$47.6	10.6	*****
Activision Blizzard	$15.7	97.3	*****
Electronic Arts (Nasdaq: ERTS)	$8.5	N/A	***
Take-Two Interactive Software (Nasdaq: TTWO)	$0.9	8.1	****

Data taken from Motley Fool CAPS on 11/04/2008.

The freshest negative CAPS comment on Activision that made any sense is over two months old, and much water has flowed under the bridges since then. Let's move on across the tracks.

The bulls have voiced six positive investment theses since last Thursday, on the other hand. scmcv calls the stock a "no brainer" because it is "a cash cow with rights to some of the hottest titles on the market right now." scottdx elaborates, counting out the biggest of those hit series: "[World of Warcraft], Call of Duty franchise, Guitar Hero franchise, Diablo, Starcraft, and the upcoming currently non-titled new [multiplayer online role-playing game] from Blizzard" are all coming down the pipeline. "Gamers are like drinkers, and we all know what stocks many flock to during down times."

What management does:
The trans-Atlantic merger between Activision and Vivendi Games is still very fresh, so it's hard to do the usual apples-to-apples numbers rundown here. What I can say is that Activision is solidly profitable, even in the seasonally weak summer months, while arch rival EA flounders. Since both antagonists address a very similar market demographic with a mix of family-friendly games and tougher shoot-em-ups, it looks like Activision runs the tighter ship here. In fact, Nintendo is the only major competitor that can match its excellent profit margins across the board.

One Fool says:
Guitar Hero: Aerosmith and the Nintendo DS title Guitar Hero: On Tour were Activision's only sales hits this summer, according to third-party reports. Those plastic guitars have taken on a larger-than-life image in Activision's board room, I bet.

But the summer months are supposed to be pretty weak since kids tend to play more outside and less in front of the TV, so the trailing numbers aren't terribly interesting. What I want out of this report is an early reading on the next big Guitar Hero game, which was released ten days ago.

See, I'm a little bit worried. The advance buzz was great, but the game isn't dominating the sales charts at various online and bricks-and-mortar retailers the way you'd expect from a big-time new release. The shelves at my local Target (NYSE: TGT) mega-mart are bursting with unsold copies of World Tour, while it took two years for the same store to get a reliable supply of Nintendo Wii consoles. In short, it's not looking good, but maybe management has a different view.

A disappointing opening week would show cracks in Activision's perhaps tallest tent pole, which would make World of Warcraft the company's far and away biggest title again. Let's hear it from the horse's mouth, though. My humble observations might not make Peter Lynch proud, being mostly local and possibly biased.