At Motley Fool Stock Advisor, we're all about finding stocks with huge long-term upside. Our research efforts double down on a company's growth potential, competitive advantages, and management quality. It's a strategy that has led to an average return of 60% for our stocks and 14% annualized returns since 2002 versus 1% for the S&P 500.

Let's see why Activision Blizzard (Nasdaq: ATVI) currently makes our buy list.

Growth potential
The video game industry isn't all just fun and games, Fools. It's one of the fastest-growing, most innovative industries on the planet. Here are a few interesting statistics on the industry, courtesy of the Entertainment Software Association and a recent report from PricewaterhouseCoopers:

  • 68% of U.S. households play computer or video games, and 42% own at least one video game console.
  • The average age for a video game player is 35, and in 2009, 25% of gamers were older than 50.
  • Video gaming is projected to easily outpace growth in most other forms of entertainment, such as movies and music.
  • Online games and those developed for mobile devices such as the iPhone and iPad are set to double over the next few years.

With $4.3 billion in sales last year, Activision Blizzard is the video game industry's leading software company and at the forefront of all these positive trends. It has produced some of the top hits in the business, including Call of Duty: Modern Warfare 2 -- the biggest entertainment release ever.

Better still, the second half of 2010 promises to be the largest in Activision's history. StarCraft II hits stores this week and may be the most anticipated game of the year (dare we say, decade). Then it's World of Warcraft: Cataclysm, the next iteration of the world's largest online role-playing game. And just in time for the holidays, first-person-shooter fans will enlist in Call of Duty: Black Ops. Looking out further, a new publishing deal with Halo creator Bungie should enrich Activision's game pipeline in 2011 and beyond.

Competitive advantages
The video game industry doesn't lack for competition.

Electronic Arts (Nasdaq: ERTS), famous for its Madden Football franchise and hit games like The Sims, is a formidable competitor. But thanks to its bloated cost structure and dearth of major new hits, EA hasn't generated a profit since 2007.

Take-Two Interactive (Nasdaq: TTWO) is best known for its Grand Theft Auto franchise and has a strong library of acclaimed, original content. But profits are tough to come by in years without a Grand Theft Auto sequel, and persistent management squabbling keeps the reins tight on Take-Two's potential.

Hardware players such as Nintendo (Pink Sheets: NTDOY.PK) and Sony (NYSE: SNE) also originate video game content, but their profits are tied more closely to the success of their consoles, the Wii and the PlayStation. The rise of cloud gaming services such as OnLive and mobile gaming on devices such as the iPad presents a potentially disruptive force to these more traditional console makers.

Besides being simply a better operator, Activision Blizzard's ownership of World of Warcraft, and its 11.5 million subscriber network, gives it a recurring cash model that is unmatched in the industry. That keeps plenty of cash coming in the door every month and helps Activision withstand the occasional blunder -- cough, Tony Hawk: Ride, cough -- on the development front. And the recurring revenue side of Activision's business should grow larger as games such as StarCraft, Diablo, and even Call of Duty steadily grow their online offerings.   

Management quality
CEO Bobby Kotick and partner Brian Kelly, now Activision's co-chairman, bought Activision out of bankruptcy in 1990 for $500,000. From the very beginning, Kotick sought to build a "professionally managed" video game company. That meant keeping a tight rein on costs, insisting on tight development deadlines, and building an organization that could withstand the occasional (and inevitable) dud.

Kotick's rigid managerial approach hasn't always gone over well with Activision's creators, resulting in the occasional squabble. But the approach has produced a consistent degree of profitability that is the envy of the industry.

Last month, David Gardner and I interviewed Thomas Tippl, Activision's COO. It wasn't a surprise to hear him speak positively about Kotick and the way he runs the business. More insightful was Tippl's discussion about Activision's strong drive to acquire Blizzard -- and its World of Warcraft franchise -- back in 2007. It was a prime example of how Kotick and his team are constantly looking forward, evolving the business, following the money, and delivering great returns to shareholders. We expect that same drive going forward.  

To get our latest thinking on Activision Blizzard and access to our current buy, sell, hold recommendations on all 90 companies on the Stock Advisor scorecard, take a free trial of Stock Advisor. In the meantime, let us know what you think of Activision Blizzard in the comment section below. Does it make your buy list?