Activision Blizzard Overruns the Battlefield

Well, we all saw this coming. Activision Blizzard (Nasdaq: ATVI  ) estimates that it sold 6.5 million copies of Call of Duty: Modern Warfare 3 on its first day, beating the first-day sales of Call of Duty: Black Ops by nearly a million copies. However, that's not the only reason Activision investors should get excited.

Surveying the field
Don't get me wrong, the first-day sales are a massive win, especially considering that Modern Warfare only launched in two markets -- the U.S. and the United Kingdom. It took Electronic Arts (Nasdaq: ERTS  ) a week to sell 5 million copies of Battlefield 3 worldwide.

In the old days, it was enough to crush your competition this soundly, but the gaming landscape has changed. Developers now hope to squeeze more revenue out of a title through downloadable content and microtransactions. For example, gamers have purchased more than 20 million map packs for Call of Duty: Black Ops at $15 a pop. This generated an additional $300 million in revenue for the company, or about twice the revenue that Glu Mobile (Nasdaq: GLUU  ) and Majesco Entertainment (Nasdaq: COOL  ) earned in 2010 combined. Given MW3's early popularity, it could bring in an even larger pile of cash through map packs.

A new secret weapon
Activision has another trick up its sleeve this time around, though. MW3 marks the official launch of Call of Duty: Elite, a social platform that allows players to track in-game statistics, form public groups as well as private clans, and share video captured during the game for free.

Players can also pay $49.99 a year for a premium membership, which includes a host of extra features including all the downloadable content for MW3 -- and I'd assume future CoD games -- and year-round competitions for real prizes.

That's right; Activision has brought subscription gaming to first-person shooters. They've done it brilliantly. By making the premium service completely optional, they don't alienate the less hardcore players while finding a way to generate predictable revenue from the series' biggest fans. It's too early to know whether gamers will pay up for the extra features, but given the franchises' popularity, Elite Premium subscribers could easily make up for World of Warcraft's declining subscription numbers.

Foolish takeaway
Although I'm concerned about Activision Blizzard's somewhat limited game catalog, I have to give the company credit for finding new ways to generate revenue from its games. I'm hoping products like Elite and the companion toys for the kid-oriented Skylanders: Spyro's Adventure will start to convince investors that Activision Blizzard is bigger than the World of Azeroth.

If you would like to keep an eye on Activision Blizzard and its never-ending quest for more revenue streams, then click here to add Activision Blizzard to your free stock watchlist.

The Motley Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and 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.

Fool contributor Patrick Martin owns shares of Activision Blizzard. You can follow him on twitter @TMFpcmart03. 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 (5) | Recommend This Article (2)

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 14, 2011, at 11:33 AM, AndyMT123 wrote:

    Have two words for you...Guardian Cub. If you don't know what it is find out. World of Warcraft is losing subs, but this will probably be a huge new revenue stream, basically Blizz is starting to sell gold, replacing the famous "Chinese gold sellers".

  • Report this Comment On November 14, 2011, at 1:15 PM, pmart wrote:

    Yeah, definitely. I'm also interested to see how the real money auction house works in Diablo 3, but I didn't have space to bring it up in the article.

    -Patrick

  • Report this Comment On November 15, 2011, at 12:49 AM, johnnnyyy2 wrote:

    One Stock I'd Buy Today

    While none of the great, proven blue-chip stocks I listed earlier are cheap enough to buy now, there is a company that's becoming a great business that I recommend you invest in today.

    It didn't qualify for our pantheon of capital efficiency because it was created via a merger in 2008. So it simply doesn't have the pedigree. Also, as a video game publisher, many investors would argue the technology in play in this space is too uncertain. I disagree. Publishing is a business I know well... and I know technology empowers publishers. It allows them to more easily connect with their customers. That's certainly the case with this stock.

    Before I tell you any more about the business, let's review the numbers.

    In the full two years since the merger, this company produced $4.2 billion in gross profit. That's revenues minus the cost of sales – before all operating costs and capital investments. In those same two years, this company distributed $2.1 billion to shareholders in the form of cash dividends and share buybacks. That's a capital efficiency of 50%, which would put it No. 2 on our pantheon above, just behind the tobacco company Lorillard.

    In terms of price, the company's shares trade for an enterprise value of $11 billion. (Enterprise value is market cap plus debt minus cash.) The company generates roughly $1.5 billion a year in cash from operations, which puts its modified P/E at 7.3x. This falls well below our price threshold of 10 times cash earnings.

    Is this a high-quality business? At first glance, you'd say no. Yahoo Finance reports the company's return on assets is only 5.9% – fairly pedestrian. Its return on equity is only 6.15% – nothing to brag about. But these numbers prove you have to do your homework...

    You can't simply rely on databases and computer-generated numbers to define what stocks you buy. Remember... I explained this company is the product of a recent merger. The way merger accounting works, the purchase price of the deal in excess of the net tangible value of the company being acquired gets recorded as "goodwill" on the balance sheet. So when you look at this company, you will find more than $7 billion of goodwill. It's a completely meaningless figure, except that it reduces the recorded returns on assets and equity.

    Simply take out the goodwill number (which is an accounting fiction) and you end up with a company that holds $6 billion in assets (not $13 billion). On these $6 billion in assets, it's earning $1.5 billion in cash each year. That's a return on tangible assets of 25%. And that's a much more accurate representation of its business.

    To summarize, compared to our pantheon of the greatest common stocks in the world, this company has the second-highest capital efficiency, third-highest return on assets, and the lowest price. I hope that explains a lot about what I see in this opportunity. But there's an even bigger reason I like it...

    As a publisher... I know this is a great business. Technology is making video games into active, online communities where people spend hours of leisure time. These communities are growing. And they are powerful, allowing publishers to increase prices and fees. That's a trend I believe will continue at the same time technology allows richer experiences and lower connectivity costs.

    Technology will also allow these publishers to adopt higher-margin distribution models, where players are able to pay the publisher directly, buying the game through subscription, instead of through a retail outlet. These trends are why I'm extremely bullish on the long-term future of the video game business.

    Consider this: In the five days following the company's last major game franchise release, it sold $650 million worth of the title. That's not total sales for the year – that's just five days of sales.

    And finally... for investors... this stock comes with an ace in the hole. Vivendi, the large French media company, owns more than 60% of it. Vivendi made the acquisition during the merger that created this business in 2008. It can only make its money back if the company continues to return capital. And since Vivendi controls the company, you can be certain that's going to happen.

    This majority shareholder situation scares some investors, but not me. I actually prefer to "partner" with large investors that have much more skin in the game. What scares me are reckless management teams, not fellow investors. And when a fellow investor holds more than 60% of the stock, the management team doesn't have much room for error. I like that.

    As you might have figured out by now, the company I've been describing is Activision Blizzard (Nasdaq: ATVI). It's one of the three major video game publishers in the world (along with Electronic Arts and Take-Two Interactive). It has two main franchises. The first is Call of Duty, a "first-person shooter" game. Players take the role of soldiers in various combat situations. The game is massively popular and allows people to play together online. This is the franchise that sold $650 million of product in five days.

    The company's other main franchise is potentially even bigger. It's called World of Warcraft. It is a massively multiplayer online role-playing game (MMORPG). Currently, World of Warcraft has attracted 11 million subscribers, who develop characters in an alternate universe. This is a whole new form of entertainment, something that wouldn't have been possible before the advent of low-cost broadband connectivity.

    And because access to the game is sold via subscription, the margins are incredibly high. In 2010, the company sold $3 billion of products at a cost of $1.3 billion. It sold $1.3 billion of subscriptions at a cost of only $241 million. Product sales as a percentage of total sales are falling as subscription sales continue to grow. And that means the company's gross margins are likely to expand substantially over the next few years. Given the company's extraordinary capital efficiency, most of these extra profits will wind up in the pockets of shareholders.

    Action to take: Buy Activision Blizzard (Nasdaq: ATVI) up to $15. Use a 25% trailing stop loss.

  • Report this Comment On November 16, 2011, at 12:49 AM, jmbenning wrote:

    Ok. I feel it important to write my concern in this comment. Where I absolutely applaud Activision Blizzard (and by that, I mean mostly Blizzard) is their ability to create outstanding and long-lasting products. I will invest in them soon, but I want to bring up an extremely important issue to anyone that seems to not be a gamer (which appears to be the author of this article). MW3 is as big as it is because of all the MW2 fans. These are the guys that have high levels on their multiplayer profiles and a good portion of them will buy the downloadable content. What this article fails to mention is that MW3 pretty much met its peak performance. There will be more sales over the holidays and within the next year, but this month at least 5 huge games came out and most people made their choice on what to buy now. What Im trying to say out of all this is, do not base this share on the performance on the one game, or it's elite package. Base it on the much larger fanbase of Diablo 3 and Warcraft franchises to come.

  • Report this Comment On November 16, 2011, at 11:57 AM, tinjim wrote:

    I bought into ATVI for $12.87 in 2009 when it was recommended by Stock Adviser. Today I'm sitting on a gain of -4.70%. When is the stock world going to realize ATVI is a good company?

Add your comment.

DocumentId: 1588923, ~/Articles/ArticleHandler.aspx, 4/18/2014 2:59:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement