Why the Big Money Bet on Activision Blizzard Makes Sense

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Activision Blizzard (Nasdaq: ATVI  ) . Are institutions bullish or bearish when it comes to this beleaguered video game publisher?

Foolish facts

Metric

Activision Blizzard

CAPS stars (out of 5) ****
Total ratings 6,990
Percent bulls 97.4%
Percent bears 2.6%
Bullish pitches 1282 out of 1346
Highest rated peers Shanda Games, Giant Interactive, Take-Two Interactive (Nasdaq: TTWO  )

Data current as of Feb. 15.

Fools love Activision Blizzard about as much as they loathe it. Certainly they love the games. The Call of Duty series and World of Warcraft (WoW) have huge fan bases. On its own, WoW has more than 12 million subscribers. The latest in the Call of Duty franchise, Black Ops, sold 7 million copies in the first 24 hours of release in November.

The annual BlizzCon gaming convention in Anaheim, CA typically plays host to more than 20,000 fans of Blizzard's various online franchises -- WoW, StarCraft, and Diablo notably. With numbers like that, you'd think Activision Blizzard would be making money hand-over-first. You'd be wrong ... and right.

Let's dig into the bad news first. Activision Blizzard's 2011 earnings projection came in about $800 million less than Wall Street expected thanks to a restructuring that will, among other things, see the once-legendary Guitar Hero franchise come off tour. The stock sold off by 11% on the news. In the wake of a great earnings report from Take-Two Interactive, Fools were understandably disappointed.

"[Activision Blizzard] was great several years ago. Guitar Hero, Call of Duty, and World of Warcraft were their winners. The games won title after title and then they lost it. Guitar Hero has been beaten out by Harmonix, Bad Company has replaced Call of Duty, and World of Warcraft is losing market share quickly to games such as DC Universe Online. [Activision Blizzard] had its day but the fat lady is singing and the piper is piping," wrote Foolish investor unlearned earlier this month.

Fair points all. Facebook and Zynga have made social gaming the new New Thing and Time Warner (NYSE: TWX  ) used last year's Comic-Con to demo DC Universe Online and it does, indeed, look slick.

Institutional ownership history

Top Owners

2008*

2009*

2010*

Latest*

BlackRock

9,161,980

24,517,847

31,394,332

31,394,332

Wellington Management Company

785,508

18,092,000

30,774,199

30,774,199

Davis Selected Advisors

1,990

27,126,013

26,242,416

26,242,416

Invesco

16,941,768

14,762,111

18,551,521

18,551,521

RS Investment Management

461,370

371,980

13,683,138

13,683,138

TOP 25 TOTAL

92,689,272

166,022,259

255,253,364

255,253,364

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

And yet you won't find many bears among the Big Money investors. Many of the top 25 institutions substantially increased their interests in Activision Blizzard last year, none more so than RS Investment Management.

In particular, the highly regarded RS Value (RSVAX) fund run by a team led by Andrew Pilara, Jr. upped its stake in the company by close to 6% in the quarter ended on Dec. 31, Morningstar reports. Other top institutional owners include Chris Davis of the Davis family of funds and the market-beating team at Vanguard PRIMECAP (VPMCX).

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Activision Blizzard 33.84% 0.76%
Electronic Arts (Nasdaq: ERTS  ) 96.91% 0.51%
Nintendo 35.44% 11.09%
Microsoft (Nasdaq: MSFT  ) 64.48% 4.04%
Take-Two Interactive 84.57% 1.02%

Source: Capital IQ. Data current as of Feb. 21.

At first glance, this ownership profile looks enticing. Big Money buyers haven't committed to the stock in the way they've committed to peers EA and Take-Two. But don't be deceived; the numbers don't take into account the 59% of the company that Vivendi owns as of this writing.

And yet with more than $3.5 billion in cash on its books and trading for less than half the cash flow multiple it earned during 2009, Activision Blizzard looks attractive to me. It's as if all the perma-bears came out of hibernation at once, with each one howling about how the company will never again captivate the market with an innovative franchise.

I think they're crazy, and I'm willing to put my money where my mouth is. I've already rated the stock to outperform in CAPS and I'll be opening a small real-money position in the stock as soon as disclosure rules allow.

Do you agree? Disagree? Let me know you would rate Activision Blizzard using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Activision Blizzard, Electronic Arts, Microsoft or Take-Two Interactive to your watchlist.

Microsoft is a Motley Fool Inside Value pick. Activision Blizzard and Nintendo are Motley Fool Stock Advisor selections. Take-Two Interactive is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended subscribers open a synthetic long position in Activision Blizzard and a diagonal call position in Microsoft. 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. 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 Motley Fool owns shares of Activision Blizzard, Microsoft, and Take-Two Interactive and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (8) | Recommend This Article (7)

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 February 22, 2011, at 2:36 PM, Borbality wrote:

    I sold my shares and came out just a few dollars ahead. I think it's a fine company and probably worth more than the stock is trading for, but I'm not sure if a software-only company already valued at 12 billion dollars can ever really break out. I mean there's just never going to be any real certainty in what they do, I would imagine, and the margins just don't seem to be there to make up for it. it could end up a great stock but I just don't have the patience or stomach for that one.

  • Report this Comment On February 22, 2011, at 4:55 PM, bottomfisherman wrote:

    So so so many people wrong about ATVI professionals and novices alike. A two trick pony, I can see very few people playing their one pony WOW in a few years its run its course and is stale. There other horse Call of Duty is an excellent title but they need more like it and they need more innovation. Stock flounders historically between 9 and 12 dollars so there is a predictable range to buy and short to make money. Hold and maybe, maybe in 8 or 10 years it will be at 18 or 20 but there are better places for ones money then in this flounder.

  • Report this Comment On February 22, 2011, at 5:16 PM, SpeleoFool wrote:

    Emotionally, I couldn't get behind an investment in ATVI, and I *know* games. Yes, Activision & Blizzard are known for some of the most successful franchises in gaming history, but my gut feel as a gamer is that all of those franchises are at their peak or in decline.

    For example, COD Black Ops sold on the astoundingly good story and online play in Modern Warfare 2. By all accounts, Black Ops is a great game, but it doesn't bring a whole lot new to the table. Add to that the storied history of COD's two developers: Treyarch and Infinity Ward. The COD franchise will continue to do well for at least one more installment, but the Guitar Hero story is a big warning for what happens whenever a company keeps selling essentially the same game year after year.

  • Report this Comment On February 22, 2011, at 5:16 PM, Melaschasm wrote:

    On the Blizzard side things are going strong.

    WoW will continue to lose market share, but each expansion will still be a huge boost. It will be at least one year and probably three before a new dominant MMORPG arrives. Just as EQ remained the biggest MMORPG for years after it was out dated, WoW is likely to do the same.

    StarCraft might end up being a minor disapointment, but it will still be a big seller, and they should have at least one expansion to bring in additional cash in the not to distant future.

    Diablo 3 will sell like crazy, but it might not be released in 2011. Blizzard is famous for late game launches, so a 2011 launch would be a nice surprise.

    Activision/Blizzard should be able to launch many successful games on tablets, but I have not seen any evidence that they are investing in this area. I think this is the gaming area that could provide a major upswing in profits if they were successful in grabbing a big chunk of the market. If they do not find new markets to compete in, then it is likely the stock price will only slowly gain, and struggle to match the S&P 500.

  • Report this Comment On February 22, 2011, at 7:40 PM, mike2153 wrote:

    I finally bought some Activision at the end of 2009 at $10.90. As of close today, I'm up a whopping .06 a share.

  • Report this Comment On February 22, 2011, at 9:25 PM, bottomfisherman wrote:

    I feel your pain mike2153. Still do not understand why this dogfish is getting so much love from CAPS and MF writers alike.

  • Report this Comment On February 23, 2011, at 3:29 AM, garifolle wrote:

    I do not know when the "disclosure rules" will allow you to take your "small" position on ATVI, but you are playing on the safe side: right now, every one is taking their profits on those stocks that have bubbled in the past weeks, whereas ATVI has already lost almost 15% of it's value, and just started regaining some momentum a few days ago, both with price and volume.

    You should also tell us how long you are going to keep that position.

    Tell me that you are going to keep that "small" position more then a year, and I'll follow you.

  • Report this Comment On February 25, 2011, at 4:04 PM, foolretire wrote:

    I may not know much about the gaming industry,(i do not game)....but it seems to me that there may be a question about how many new "gamers" the industry as a whole attracts. If the number of Gamers stays relatively flat, then ea new game would seem to cannibalize the sales of the "older games". Wouldn't it make more sense to invest in a company that is constantly attracting potential new customers for a whole range of products, and not just current customers switching from game to game? I would think growth of customer base is more important in the long run than cash flow. There are a lot of people out there who are not gamers,....alternatively,...as an example of a growing customer base,...almost everyone wants or owns a smart phone.

    I even own a small # of ATVI shares, am currently down, and wonder about the reality of a catalyst that would propel the stock higher, especially since an all time record sales in Dec of the new game did not.

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