Buy, Sell, or Hold: Activision

Many analysts (Fools included) see big growth opportunities ahead for video game publisher Activision Blizzard (Nasdaq: ATVI  ) . In addition to a recent 9% dividend increase, the company has been innovating to try to create long-term value for investors, but is it working?

Buy
Finding new ways to generate recurring revenue in an industry traditionally dependent on initial sales is Activision's specialty -- first with World of Warcraft and then with Call of Duty: Elite (both of which I'll return to later in this article).

Activision's newest recurring-revenue franchise is Skylanders. The innovative children's game is one of the first successful attempts at marrying physical toys (small figurines) with a video game. Since October 2011, when they were first released, Skylanders figurines and game copies have sold just under $200 million in the U.S., which is 4.2% of the company's 2011 total sales. A sales associate at my local Best Buy tells me these things have been sold out all year (and he was pretty shocked I didn't already know this). With new characters periodically released and a new video game slated for this fall, it definitely seems like a franchise that can be refreshed to maintain staying power.

Another new game, Diablo III, also has potential to provide Activision with yet more recurring revenue. The highly anticipated role-playing game will feature an in-game auction house, which will allow players to list game items in a marketplace for a flat fee. The auction will use real money by connecting to users' PayPal accounts. If this catches on with the millions of players this game already has lined up, it could generate major cash for both Activision and its stockholders.

Sell
World of Warcraft may still have been the No. 1 game in its class for 2011, but subscriptions were down nearly 10% from 2010. If that trend continues in spite of an upgrade for the game coming out later this year, then Activision would need to lean heavily on its other franchises to pick up the slack. That would be a lot of slack to pick up, though, with millions of users paying $15 a month, and none of their other franchises providing such steady or reliable sources of revenue just yet.

The video game industry in general is also hurting. According to the NPD Group, U.S. retail sales of video games -- including hardware, software, and accessories -- have fallen 25% from March 2011. When you put that up against the meteoric rise of mobile gaming, which is expected to double by 2016, then it's easy to see arguments for putting your money in a company like Zynga (Nasdaq: ZNGA  ) instead . They might seem like different beasts right now, but that's what everybody used to say about Best Buy and Amazon.com, too.

Hold
Activision hasn't completely given up in the race against mobile, though. Skylanders recently launched on the iPad and other mobile devices. If the mobile version of the game works as well as the console versions, then parents on the go may deem this the perfect backseat partner. If not, then Activision will need to come up with another way to keep the game fresh and relevant for a finicky children's market.

On the adult side, Call of Duty: Elite was a great idea, but whether or not it will stand the test of time remains to be seen. While giving an avid fan base a place to keep track of their overall playing statistics for the game and create clans with their friends seemed like a no-brainer home run, it hasn't really taken off.

While 7 million members may seem impressive up front, investors should keep in mind that it was launched with Modern Warfare 3, which sold 6.5 million copies on the first day alone, and went on to become the best-selling game of the year. This means that 7 million is likely just a drop in the bucket of worldwide players.

It's also questionable that Activision doesn't quote the number as "active" members. Many gamers only signed up for the free maps, and haven't found the service useful or interesting beyond that. Renewal rates correlate with engagement, so if Activision wants to keep them coming back for more, it'll have to figure out a way to reel these players back in, and an (unconfirmed) Call of Duty: Black Ops 2 this fall may not be enough.

Losing their footing in the popular first-person-shooter category would leave room for competitor Electronic Arts (Nasdaq: EA  ) to swoop in and pick up the discontented players with its Battlefield franchise.

Foolish takeaway
While the cons are definitely relevant red flags worth watching, I agree with other analysts who think Activision is a great pick right now. The company has successfully built a number of strong franchises that seem to be as timeless as technology will allow, while still showing innovation and broadening its horizons. A few months ago I gave Activision a thumbs-up CAPScall, and I stand by that today. Click below to make your own call and add any of the stocks above to your watchlist:

Fool contributor Amanda Buchanan owns shares of Activision Blizzard, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Fool owns shares of Amazon.com, Activision Blizzard, and Best Buy, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Amazon.com. Motley Fool newsletter services have also recommended creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On April 25, 2012, at 2:06 PM, JacquesOtten wrote:

    With regard to the fear over WoW as a sell argument: Which other game with a release date in 2005 or earlier, by any other entertainment company, is still being played by around 10 million worldwide? Given the high speed of technology development, these products do not generally have a lifespan of this length. WoW will continue to thrive as a well supported game for at least the same number of years since it's release. Few other companies pull this of with one of their games, let alone all of their games (like Activision does). I look at WoW's record as an indication of Activision's continued devotion to quality entertainment, not as a sign of decline. Activision will continue to offer the same quality-oriented value proposition, and it will yield many more long-lived products.

  • Report this Comment On April 26, 2012, at 12:03 AM, Luckylindy3443 wrote:

    Buy Buy !!! Stoped at some 40 plus gamer retail sites over the past 4 weeks from Illinois to Florida, All say pre- orders of Diablo III have been crazy with a release date I'm told of May 15, Special midnight openings and other incentives have the hipe going strong across all age ranges. Then the sure timed release of Call Of Duty in late 2012. This is just the icing on the cake, add the other games ventures and WOW revenues. Buy Buy!!

  • Report this Comment On April 28, 2012, at 8:02 PM, thesmartestfool wrote:

    The answer to the question in the title is easy.

    BUY ATVI stock NOW before it takes off after early May. ATVI's four franchises have built in recurring revenue streams and the company has made moves that ensure it will dominate the Video Game market for months to come. ATVI's May earnings report will likely confirm this. The 4 reasons you should buy ATVI now are listed below (and yes - I long ATVI right now).

    SKYLANDERS:

    If there are parents willing to pay over $1,000 at auction for a rare Skylander figure, and NPD shows that ATVI captured 22% of the video game accessory market with Skylander's figures ALONE, then imagine how wildly popular the Skylander's Sky Patrol app in the Apple Store has been? Its only .99 cents...but if you want more gems to use for the app, then you'll be paying $1.99 - $49.99, over and over, and over again...

    DIABLO III:

    VG Chartz shows that pre-orders currently stand at over 600,000. These figures probably don't account for pre-orders paid for directly to ATVI via the company's own Battlenet web site. Also, the game's real moneymaker isn't going to be in the sales of the game, they will be generated via the "in-game" auction house. I'm sure ATVI's revenue models have shown the company that this is where the real money is to be made, which is why they are giving away copies if you buy an annual subscription to WoW. Beta reviews of Diablo III have been favorable after ATVI ran a beta test weekend, although there were complaints that the game performance was slow...although that's more likely due to number of beta testers jumping on servers than problems with the game itself. Most importantly, game functionality seems to indicate that Diablo III was designed to be transferred to consoles (i.e. PS III and X-box). If this happens, think Skyrim type sales numbers, but more importantly, expect over 10 million Diablo III players to be making use of the in-game auction house.

    COD MW 3:

    The game has sold over 24 million copies since released in 2011. It has remained in the top 10 and top 20 global sales of all video games according to VG chartz in every month since its release, including this month. More importantly, remember that map packs for the game were released after January. Map packs are sold digitally direct to players, meaning more revenue directly to ATVI. Even if only 50 percent of the overall player base purchased 1 map pack, we're talking about nearly pure profit from 12 million buyers. Also remember that ATVI linked map packs with their CoD Elite Subscription, which gives even more incentive to the 24 million MW 3 player base to sign up fro the service (at only $50 a subscription for a full year).

    WORLD OF WARCRAFT:

    After seeing the beta for Mists of Pandaria, its clear that ATVI is pursuing a very specific strategy for this game. VG chartz shows that top selling games in Asia are significantly different than those top selling games in the US and Europe. Top selling games in Asia have a different feel, and a different look...the kind of feel and look that "Mists" seems to provide. This strategy also explains why the agreement between NetEase and ATVI was renewed so quickly and easily. Both parties understand that this will be big.

    Additionally, the SWTOR release probably added to the numbers decline that WoW previously saw. All reviews of SWTOR make it clear that the game was more content and story based. EA has failed to create more significant content for that game, which means that players will have likely gotten bored and returned to WoW, which has a much more robust player versus player aspect to the game. The addition of the upcoming Mists of Pandaria release will generate new interest in those players who are solely interested in seeing whether their traditional characters can beat up on a Monk Panda...

    If you don't believe me, then just check Yahoo to see insider transaction activity for ATVI since March 15th. There has been NONE. This is significant because this type of insider activity only normally occurred in January of 2011 and 2012, which was right before ATVI released its blockbuster CoD franchise sales numbers. Its also significant because it hasn't happened in any other month.

    Bobby Kotick and his crew provided a forecast of .01 cent earnings per share this quarter. I suspect he and all of his officers know that they blew that number out of the water...

    Expect a jump in ATVI stock price after its May 9th earnings report. Only a fool would short the stock after that bounce though because Diablo III releases on May 15th. Sales figures of the release of Diablo III will likely be released shortly thereafter... Those interested in shorting ATVI should wait until June...

    Yes - as I said before, I'm long ATVI...

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