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What's Holding Activision Blizzard Down?

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The past few months have been good to Activision Blizzard (Nasdaq: ATVI  ) . Overall video game sales jumped 20% in April. The company's Call of Duty: Black Ops is the best-selling game of all time, and Activision's first-quarter results beat expectations. All this good news should have moved the stock price at least a little, but shares have remained flat. The stock's absolute failure to move seems to defy logic -- but if you talk to gamers, it starts to make a lot more sense.

It's not the balance sheet
Activision is about as healthy as a company can get. According to first-quarter results, sales of both games and subscriptions increased year over year. It carries no debt and reported EPS of $0.13, beating analysts' estimates of $0.08.

In the most recent quarter, free cash flow did drop from $215 million to $130 million year over year. However, for all of fiscal 2010, free cash flow rose to $1.3 billion, from $1.1 billion in the previous year. That gain should have earned the stock some investor love. So why didn't it?

It's the games
With five of North America's top 10 best-selling games of all time under its belt, it's hard to believe that Activision's Achilles' heel might be the very games themselves -- unless you're a gamer.

Those of us who have been playing games for more than two decades know that game concepts come and go frequently, but characters remain. Nintendo (OTC BB: NTDOY.PK) -- publisher of four of the top-selling titles of all time -- has drawn from essentially the same cast of characters for more than 25 years, but it keeps reinventing the concepts. We've seen its mascot Mario in 2-D platformers, 3-D adventures, fighting games, party games, kart racers, and much more. If Nintendo ever decided to go gritty, it would release Mario Bros: Mushrooms of War. We would buy it, too, because it's Mario, and it would be awesome.

In contrast to Nintendo's colorful characters, Activision specializes in concept-based games, and too many gamers feel like those concepts have grown a little stale. Call of Duty: Black Ops is selling well, but it's also the sixth game in the series. We've already watched the company ride the Tony Hawk's Pro Skater series until the wheels fell off -- literally, in the case of the skateboard-deck controller that came with the series' last game. The sudden death of music games seemed to surprise the entire industry. And although I'm not prepared to say that the online kingdom of Azeroth is dying, World of Warcraft mysteriously lost 600,000 subscribers between Activision's 2010 annual report and its 2011 first-quarter results.

In this light, when longtime gamers learn that 62% of Activision's revenues come from World of Warcraft and Call of Duty, they get worried. When they learn that the company plans to further reduce the number of titles it plans to develop, they get really worried.

Perhaps we're being too harsh
However, Activision's narrowed focus doesn't mean it won't launch or acquire another great franchise. Just look at its recent roster. Tony Hawk, Guitar Hero, Call of Duty, World of Warcraft, Diablo, and StarCraft all either defined or dominated their genres. The company may refuse to let a tired franchise die, but it's also a master of finding or creating blockbuster brands. The odds are very good that the company will already have launched a new hit series long before we've gotten tired of realistic first-person shooters and late-night dungeon raids.

Unfortunately, until we see that new franchise, the stock will remain flat.

Interested in keeping an eye on Activision Blizzard? Click here to add it to your watchlist.

Fool contributor Patrick Martin owns shares of Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services have recommended Activision Blizzard and Nintendo, and recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services 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 Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (9)

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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 June 03, 2011, at 4:08 AM, unmarkedone wrote:

    I love holding ATVI as a substantial part of my portfolio. Activision's side of the house knows how to churn out some serious cash (and hype), and Blizzard's studio has been turning everything it touches to gold, consistently, for 20 years.

    While the stock price hasn't seen much love recently, I'm absolutely psyched about the coming boom when Blizzard's next MMO game (note: not a WoW-clone) picks up 10-15 million subscribers, and Diablo 3 hits the shelves. 2012-13 are going to be incredible years for ATVI.

  • Report this Comment On June 03, 2011, at 12:48 PM, bottomfisherman wrote:

    With Black Ops it is a one trick pony, though Diablo does do well for them. They pulled the plug on Guitar Hero, Tony Hawk only appeals to a small segment of gamers. I and many others can be counted in those 600,000 less subscribers. WOW was a great game and concept. It has gotten old and stale. So until they can come out with more then one or two winning products this stock is going to be seasonal and continue to lag.

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