Is Activision the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Activision Blizzard (Nasdaq: ATVI  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Activision.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 47.9% Pass
  1-year revenue growth > 12% 3.8% Fail
Margins Gross margin > 35% 50.4% Pass
  Net margin > 15% 7.3% Fail
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 3.64 Pass
Opportunities Return on equity > 15% 2.9% Fail
Valuation Normalized P/E < 20 29.49 Fail
Dividends Current yield > 2% 1.3% Fail
  5-year dividend growth > 10% NM Pass
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Activision started paying a dividend in February 2010. Total score = number of passes.

With a score of five, Activision won't make the top-scoring list. But given tough times that the video game industry has been going through lately, Activision's score is actually somewhat impressive.

Video game manufacturers like Activision are facing the same problem that Hollywood has had for years: milking just the right amount of money from long-running franchises without overstaying their welcome. Between the Electronic Arts (Nasdaq: ERTS  ) series Medal of Honor and Take-Two Interactive's (Nasdaq: TTWO  ) Grand Theft Auto, gamers are getting bored with the same old, same old.

That makes Activision's acquisition of Blizzard and its World of Warcraft seem like an incredibly smart move, as it provides revenue from die-hard fans willing to pay ongoing subscription prices. With console sales from Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) down, online gaming seems like the bigger growth area for Activision and its peers.

Despite its growth challenges, Activision has an impressive balance sheet and just started paying a dividend this year. If the company can resurrect the innovation that gave my Atari new life in the early 1980s, it should recover strongly in the coming years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Activision to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Activision Blizzard and Electronic Arts are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value choice. Take-Two Interactive is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended a synthetic long position on Activision Blizzard and a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Microsoft, and Take-Two Interactive. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (9)

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 November 02, 2010, at 11:03 AM, mikecart1 wrote:

    Why so much focus on ATVI lately? Any new investor can see what it did between 2008-2010 and see it didn't even trend with the market or 90% of the stocks in the market. Come on Motley Fool. Get real. With a beta of 0.54, ATVI is only better than CD's, Bonds, and bottom tier stocks.

  • Report this Comment On November 02, 2010, at 11:34 AM, BioBat wrote:

    You have to realize that gaming stocks go through fairly cyclical cycles sprouting up every 5-7 years (or with every new hardware release) and right now, gaming is in a lull. ATVI gets lumped in with every other gaming stock even though last year, it had the highest grossing entertainment release EVER, and continues to generate good revenue and some growth when most gaming companies aren't doing anything.

    With a forward PE of 14, PEG of 1.09, and a slew of upcoming releases, and being in the middle of a hardware generation, there's not going to be many better opportunities to buy ATVI than right now.

  • Report this Comment On November 02, 2010, at 5:40 PM, dandles2020 wrote:

    It seems like an excellent time to write about ATVI. Call of Duty comes out November 9, and is getting some decent buzz, the next quarterly report will reflect the sales of Starcraft II and Cataclysm, the World of Warcraft sequel, comes out December 7th. With all of that, there should be a good chance the stock will see at least a bit of movement, but what do I know?

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