Is Activision Blizzard's Growth Sustainable?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus -- hence this regular series. We'll be taking a closer look at many of the market's great growth stocks, to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is Activision Blizzard (Nasdaq: ATVI  ) , a maker of popular console games such as Guitar Hero and Call of Duty, as well as the owner of the worldwide phenomenon known as World of Warcraft. It's been a great business for years. So good, in fact, that David Gardner's original pick for Motley Fool Stock Advisor had more than tripled as of this writing.

Foolish facts

Metric

Activison Blizzard

CAPS stars (out of 5)

*****

Total ratings

6,483

Percent bulls

97.8%

Percent bears

2.2%

Bullish pitches

1,203 out of 1,248

Highest rated peers

Dynamics Research, AUTONOMY, Qlik Technologies

Data current as of Sept. 2.

Fools are as fanatical about Activision Blizzard's stock as they are its games. "The other day I was at jury duty and as I was coming back for lunch, the two security guards barely noticed me as I came through the metal detector. They were engrossed in Warcraft. That male-bonding ritual that substitutes for stock talk and sports gossip for a certain portion of the 18-45 male demographic," wrote Foolish investor johnnykillz recently.

While not exactly reassuring for judges and jurors, this is the sort of singular loyalty that can make for outstanding stock returns. The question is whether Activision Blizzard can parlay this loyalty into a continuing growth story.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

130%

Not material

Not material

Revenue growth

3.8%

41.4%

124.3%

Gross margin

50.4%

46.1%

39.2%

Receivables growth

(32.6%)

(24.1%)

769.6%

Shares outstanding

1,224.4 million

1,268.3 million

1,324.4 million

Source: Capital IQ, a division of Standard & Poor's.

Answering that question gets difficult, given the data in this table. Let's review:

  • Activision Blizzard is a cyclical business that earns cash from new releases. As such, studying revenue and net income isn't likely to tell us much. To be fair, revenue gains were partly due to comparing the new Activision Blizzard with its pre-merger self. (Activision and Vivendi Games merged in mid-2008.)
  • Yet there's good news in the table. Management has used Activision's generous cash flows wisely, buying back shares and instituting a dividend that pays 1.3% as of this writing.

Competitor checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Activision Blizzard

Not applicable

Electronic Arts (Nasdaq: ERTS  )

Not applicable

Giant Interactive (NYSE: GA  )

5.6%

Microsoft (Nasdaq: MSFT  )

8.1%

Nintendo (Other OTC: NTDOY.PK)

(12.9%)

Take-Two Interactive (Nasdaq: TTWO  )

Not applicable

Source: Capital IQ.

If anything, this table says that video games are a more mature business than any of us would like to think. But should we really be surprised? I'm in my 40s now, and I grew up playing video games.

Grade = unsustainable
Maturity works against Activision Blizzard in this test, but I'm not sure it matters. At 13.9 times next year's expected normalized earnings, the stock is reasonably priced, while the dividend adds a layer of protection against sustained losses. This may no longer be a growth story, but it's still a good story.

Now it's your turn to weigh in. Do you like Activision Blizzard at these levels? Would you make it one of our 11 O'Clock Stocks? Let the debate begin in the comments box below. When you're done, click here to get today's 11 o'clock portfolio pick.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive is a Rule Breakers recommendation. Activision Blizzard, Electronic Arts, and Nintendo are Stock Advisor selections. Motley Fool Options has recommended subscribers open a diagonal call position in Microsoft and a synthetic long in Activision Blizzard. Finally, the Fool owns shares of Activision. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Activision Blizzard and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2010, at 12:23 PM, dargus wrote:

    When I bought ATVI it had nothing to do with growth. I see WoW as a steady source of cash flow, which isn't something every game producer has.

  • Report this Comment On September 07, 2010, at 12:47 PM, RedandBlack wrote:

    I agree with dargus. I've never thought of ATVI as a growth stock but as an undervalued cash flow king. The depth of the cash flows over the next few years should cause the stock price to catch up with its value.

  • Report this Comment On September 07, 2010, at 2:16 PM, covertmonkey wrote:

    Just one word Starcraft !

    - The national sport of Korea, they even televise matches!

    A hugely popular game + lots of potential for revenue earning if they choose to charge for extras or gaming leagues.

  • Report this Comment On September 07, 2010, at 11:16 PM, phsamuel wrote:

    Totally agree with covertmonkey! I doubt the author really knows the company at all without even mentioning Starcraft 2. Blizzard is an amazing game company who is obsessed with the qualities of their games. I don't see the cash flow from WoW will slow down substantially in near future. And ATVI probably will have big boost on their spreadsheet this quarter due to Starcraft 2.

  • Report this Comment On September 08, 2010, at 7:36 PM, Stachey wrote:

    Starcraft2 release is only the human side. They have two more segments, Protoss and Zerg, that have yet to be released. SC2 is very well done and has provided the Warcraft players an outlet while they wait for the Cataclysm expansion to release. Then the SC2 expansions can be released to fill in, ad infinitum.

    They're keeping the product pipeline filled with releases and keeping the gaming community hooked on $60 games every half year. Nice business plan.

  • Report this Comment On September 09, 2010, at 2:30 AM, EvanCarroll wrote:

    Fact check on comments:

    Just FYI, Starcraft2 has run into problems with syndication on Korea TV. The KeSPA never came to an agreement with Blizzard, and they rumor is they played a part jacking Starcraft II's rating to 18+ which would essentially burn the bridge back to negotiations -- even though negotiations officially stopped a while ago now.

    And, as for WoW providing revenues: in 2009, WoW only accounted for 1.248B/4.279B. That means ~2.5Bish comes requires impressive games that sell, or expect a really sour P/E.

  • Report this Comment On September 13, 2010, at 3:11 PM, clayman14 wrote:

    This seems to be a pretty risky stock. Modern Warfare 2 was a great game but it had a lot of problems another miss like that won't be good. As a gamer I've played and loved all the COD titles and my wife is a big fan of WoW. However, their is quality competition out their if they miss again on their COD (Call of Duty) release in November the could lose a big fan base that would be hard to recapture. Management must push HIGH quality. For us adult gamers there are only so many hours available for entertainment time. How we choose to spend that time and therefore money is a careful decision. Unlike a movie franchise that is a waste of only two hours for a $10 movie ticket isn't a big deal. But a waste of 30 to 50 or more hours on a game that isn't HIGHLY entertaining is a big loss of time regardless of price. Any slip in quality (and there already has been one with MW2) is dangerous. However, note that Activision did fire those at Infinity Ward for the quality issues with MW2 so management sends a strong signal here for no tolerance for lack of quality.

  • Report this Comment On October 02, 2010, at 1:15 AM, NinjaHamster wrote:

    Whilst Blizzard is upholding their end of the deal - let's not neglect the fact that Guitar Hero is no longer a major seller (nor are their other music games such as DJ Hero taking up the slack), Infinity Ward (well the primary assets of that studio) are now gone and CoD may now be on a downward slope - once again with no new franchises to take up the slack.

  • Report this Comment On May 11, 2011, at 2:38 PM, dcgamer wrote:

    What you don't see in Activision - Blizzard's quarterlies is the state of the MMORPG biz. ATVI see a great deal of revenue from WoW. It's a model that's served ATVI very well, but it's an old, tired cash cow.

    Cataclysm might very well have been WoW's last hurrah. If you've played Rift - a new MMO, there are clear indications players are leaving WoW for that game. And with Star Wars: The Old Republic and Guild Wars 2 both expected this year, it's hard to see how WoW will continue to rake in the revenue it once did.

    If WoW gets hit hard, then ATVI is a company with two products - Call of Duty and StarCraft. That's not a good business model.

    I mentioned this briefly in this article. Hope it's okay to post the link.

    http://technorati.com/entertainment/gaming/article/activisio...

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