Has Activision Blizzard Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Activision Blizzard (Nasdaq: ATVI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Blizzard.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

40.9%

Pass

 

1-Year Revenue Growth > 12%

5.1%

Fail

Margins

Gross Margin > 35%

57.6%

Pass

 

Net Margin > 15%

13.8%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

3.17

Pass

Opportunities

Return on Equity > 15%

6.2%

Fail

Valuation

Normalized P/E < 20

21.59

Fail

Dividends

Current Yield > 2%

1.2%

Fail

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Activision Blizzard started paying a dividend in Feb. 2010. Total score = number of passes.

When we looked at Activision Blizzard last year, the company had a score of five; but last year, it got an extra point despite having just started paying a dividend, so for the most part the company's numbers look very similar to how they did last year. The game maker has failed to reignite its growth in the past year, but margins widened somewhat and the company's valuation is somewhat more attractive.

Activision has been trapped in a struggling industry. Both 2009 and 2010 were weak years for sales of both hardware and software. But this year, things look like they might finally be starting to turn around, although modest sales gains at Activision and Electronic Arts (Nasdaq: ERTS  ) stand in contrast to drops from Take-Two Interactive (Nasdaq: TTWO  ) and THQ (Nasdaq: THQI  ) .

One big change over the past year has been the emphasis on motion-tracking games. The success of Microsoft's (Nasdaq: MSFT  ) Kinect has brought smaller players like Majesco Entertainment (Nasdaq: COOL  ) into the forefront. But Activision is positioned better to take advantage of quickly growing emerging markets, with licensing partner NetEase.com (Nasdaq: NTES  ) showing big success with Activision's World of Warcraft franchise.

For Activision, a lot is riding on next week's release of the latest installment of the Call of Duty series. With last year's Black Ops having sold a record $360 million in its first day, the new game's results will make or break Activision's holiday season. If it does well, then Activision could enter 2012 a whole lot closer to perfection than it is right now.

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 Blizzard to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Take-Two, Activision Blizzard, and Microsoft, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of NetEase.com, Microsoft, Activision Blizzard, and Take-Two, as well as creating a bull call spread position in Microsoft and a synthetic long position in Activision Blizzard. 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 (5) | Recommend This Article (3)

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 03, 2011, at 2:28 PM, harm991 wrote:

    I am more concerned about the upcoming figures rather than the historical ones.

    There is a reason why there are so much WoW ads nowadays - subscribers are declining tremendously. Activision's IPs are losing ground and Diablo III has yet to make their way into the masses.

    I'm curious about their earnings call in a few days, but I am even more concerned about the earnings call after that.

  • Report this Comment On November 03, 2011, at 2:38 PM, chrisguns521 wrote:

    Call of duty will sell through the roof again, diablo 3 and HOTS will be hits and you prolly don't even no what Titan is yet, do you?

  • Report this Comment On November 03, 2011, at 3:34 PM, harm991 wrote:

    CoD might sell good, I'm neutral about that. Diablo III idem. Starcraft II is very nice when it comes to competitve matching, but to be realistic, it will not sell more than the first installment at most.

    That aside, by the time Titan releases in the MMO market in 2014 (maybe later knowing Blizzard) the market might already be completely filled up with free alternatives. Would you quess everything on 1 MMO FPS Sci-fi which releases in x years from now?

  • Report this Comment On November 03, 2011, at 3:39 PM, harm991 wrote:

    It is just my cup of tea, you don't have to agree. I'm just quite unsure about the upcoming years. Especially when more and more people are creating real quality games which are sometimes even free and more news related to hacking (the singleplayer of HOTS might be playable before release).

  • Report this Comment On December 21, 2011, at 7:59 PM, chrisguns521 wrote:

    Real gamers don't want free games. They will pay out the ass to play quality games, such as WoW or Call of Duty Elite. The upcoming years look really good to me. SC2 doesn't need to have COD type sales to be a big success. It's already the most competitive game I've ever played and can be extremely addictive(ie South Korea). I've never played any of the Diablo games, but I'm very exited to play this new one because Blizzard can't seem to produce a bad game and its a good foil to SC. Also, I saw somewhere that Titan was scheduled for 2013 and I think it will undoubtedly be a success, considering how much money they are investing in it.

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