Throw This Stock Away

The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Activision Blizzard (Nasdaq: ATVI  ) .

The Diablo made me do it
Shares of the world's leading video game company have been meandering in the pre-teens for most of the past three years.

The stagnancy makes sense. Video game industry sales have also been sluggish over the past three years. Diehard gamers are still loyal, but mainstream audiences have moved on to cheaper and casual diversions.

There's a wide range of opinions around Fooldom when it comes to Activision Blizzard. It's a popular recommendation in some of our newsletter services. The compelling valuation and its 1.5% yield are attractive to many of my fellow Fools. Alex Planes disagrees with my theory about casual and social gaming eating into traditional video game sales, but where are the gamers?

Activision Blizzard is still the top dog here, but it's hard to get excited about the company outside of its annual Call of Duty updates. Last month's debut of Diablo III was supposed to be a needle mover, but server outages have taken a karma-sized chomp out of the publisher's decision to require connectivity for its play modes.

We've also seen millions of gamers defect from its World of Warcraft juggernaut. Bulls cheered when the online game closed out its latest quarter with 10.2 million players -- sequentially flat after several periods of declines -- but there's more to that particular story. Several months ago, Activision Blizzard offered to give anyone committing to a year of World of Warcraft some free virtual goodies and a free digital copy of Diablo III. That's a $60 game, folks, making this a desperate deal which is essentially paying for eight months to get a full year.

Adding salt to the wound, Electronic Arts (Nasdaq: EA  ) shed 400,000 virtual jedi warriors on its relatively new Star Wars: The Old Republic game during the same quarter. Where did they go? Shouldn't they have been wooed by Activision Blizzard's devilish promotion?

Let's go to the tape. Analysts see Activision Blizzard's revenue climbing by a mere 2.1% this year and 2.6% next year. This is a company barely keeping up with inflation, and Wall Street may be a bit generous here. It will take several years before all three consoles have sizable audiences for their next-gen consoles, and along the way, it will be splintering fan bases across older and new platforms that may not be compatible. It's against this backdrop that smartphone and tablet sales are booming, giving gamers playing devices where Activision Blizzard is way behind the curve.

Activision Blizzard may be cheap, but it's cheap for a reason.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • Apple (Nasdaq: AAPL  ) : Even before all of this week's WWDC 12 goodies, the world's most valuable technology company has set itself as a casual gaming hub through its App Store. There will always be people willing to spend $60 on Diablo III instead of buying 60 $0.99 apps, but the emerging marketplace can't be ignored. Rovio's Angry Birds Space has been downloaded more than 100 million times in three months across Android and Apple's iOS devices. Something important is happening here. Apple and Activision Blizzard are both fetching less than 11 times next fiscal year's earnings, but the class act of Cupertino is the one really growing nicely here.  
  • Take-Two Interactive (Nasdaq: TTWO  ) : The publisher of renegade video games hasn't been much of a player lately. Revenue fell 19% in its latest quarter, and its deficit widened sharply. However, we know that Grand Theft Auto V is coming sooner rather than later. EA and Activision Blizzard are starving organically, and Take-Two has to be a no-brainer acquisition target. Take-Two's guidance calls for an adjusted profit per share of $2.00 to $2.25, which means that even a buyout in the mid-$20s would be accretive to either EA or Activision Blizzard.
  • Microsoft (Nasdaq: MSFT  ) : Of the three console platforms, Microsoft's Xbox 360 has set itself apart from the pack. Mr. Softy has a growing user base of premium-paying connected gamers, and it's been offering more services to its players beyond games. The console has become the centerpiece of home entertainment, and that means more time devoted to things other than gaming. Microsoft's leading the way here, and its stock is also dirt cheap here.

Longtime Fool contributor Rick Munarriz does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Microsoft. The Fool owns shares of and has written calls on Activision Blizzard. The Fool owns shares of Apple. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Google, Apple, and Microsoft. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. 

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 (9) | Recommend This Article (6)

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 June 11, 2012, at 2:48 PM, reeshau wrote:

    Rick,

    I'm surprised a fresh take on Activision would not mention Vivendi's pending decision on its controlling stake. Wouldn't throwing it away now be missing out on a speculative opportunity, at least? A decision might only be 11 days away!

  • Report this Comment On June 11, 2012, at 3:26 PM, Marmadukemark wrote:

    I bought ATVI because it was a highly-touted recommendation by The Fool. Who's the Fool, The Motley Fool or me?

  • Report this Comment On June 11, 2012, at 7:34 PM, ClimbinFool wrote:

    Marmadukemark,

    The Motley Fool encourages dissenting opinions between its own analysts in the spirit of honest discussions on investing ideas. There isn't a company line as far as which stocks to endorse and which to trash. Just because Rick thinks ATVI isn't a good investment doesn't mean the other Fools who endorse it are wrong. Everyone is entitled to their opinion.

  • Report this Comment On June 11, 2012, at 11:44 PM, JULPAC wrote:

    I would hold off for the long term - why? - For the central theme in all of Blizzard Games that make them best sellers - their cinematic CGI making capability set in & throughout their games.

    Years ago rumors swirled around the idea of Blizz/Activison going into the movie making business much like Pixar & if there's a company that could give Pixar a good challenge at the movie box office its Blizzard.

    This was just a rumor though & should be taken w/ a grain of salt, but at the same time I highly suggest taking a moment to see some of their cinematic trailers on YouTube.

  • Report this Comment On June 12, 2012, at 12:04 AM, Nomadder wrote:

    Diablo 3 has been a great disappointment to a lot of people. I would also argue that due to the poorly thought out, boring item system (in a genre where items are what provides the "slot machine" addiction), even people that are currently enjoying the game will tire of it long before most tired of its successor (or even other loot-centric games, such as Sacred, Borderlands, or Torchlight).

    In response to many of the concerns from fans, I have detected evasion, arrogance, and dismissal in the responses from Blizzard.

    Neither the state of Blizzard's newest flagship release, nor their manner in dealing with fan disappointment leaves me wanting to invest in the future of the company.

  • Report this Comment On June 12, 2012, at 12:22 AM, TMFBiggles wrote:

    @ Rick -

    I don't disagree that MMOs are losing subs, but I think the reason is more that MMO design has become extremely stale and repetitive, rather than that casual games have become a compelling alternative.

    @ JULPAC -

    Square Enix has made some fantastic cutscenes and game trailers for the Final Fantasy series, but its full-length 3D animated feature flopped badly. Pixar succeeds because it tells great stories, not just because their movies look mind-bendingly awesome.

    Blizzard's been trying to get Warcraft made into a movie for years, and that's really the only property they have that would be popular enough to justify a big budget picture. It's been in development hell for years as well.

    Also, to be honest, I'd rather watch an Assassin's Creed feature film before any Blizzard-branded film. I highly suggest taking a moment to see some Assassin's Creed trailers, particularly the one for Revelations.

    Just some of my humble opinions.

    - Alex

  • Report this Comment On June 12, 2012, at 9:12 AM, mikecart1 wrote:

    Traded and made a lot from ATVI from 2009-2011. However, the returns were pretty pathetic compared to many other stocks in that time frame ~ 25%. ATVI never went to $20/share like I thought it would. Starcraft 2 didn't do any good and the video game industry seems to not move share prices much. I also couldn't stand the CEO. ATVI isn't a bad stock. It just isn't a good stock either. Reminds me of a worser version of JNJ. I don't own either.

  • Report this Comment On June 12, 2012, at 11:50 AM, Scerabi wrote:

    I have to strongly disagree with this position.

    1) No mention of Skylanders which is a thoroughly impressive game (33 week old top selling single console game in 2012?) that's created a new revenue stream for ATVI that no one thought was possible. Kids are addicted to purchasing every one of the $10'ish toys that goes with this game.

    2) Diablo III is a failure that just happens to be breaking PC game sales records left and right.... Sounds like a failure I would love for them to duplicate as many times as possible. Anyone who has knowledge of massive online game launches will realize that these issues happen EVERY SINGLE time a new huge game is released. With six million people logging into a game at one time the only people who expect this to run smoothly are people who have no knowledge of these types of games.

    3) The real money auction house (RMAH) will more than make up for any World of Warcraft subscription losses. This RMAH can be copied to the other Blizzard games for huge potential revenue streams.

    4) Diablo III is a near perfect fit to be produced for consoles. There will be some issues with battle.net and the auction houses but ATVI has handled MUCH more challenging problems. Eight abilities in DIII = Eight buttons on a console controller?

    5) New MMO which will further make up for any losses in WoW. If you disagree, please show me a history of games where ATVI expected to hit homeruns that have failed? Imagine what happens if the new MMO gets 5 million+ subscribers while WoW still holds on to a good portion of theirs?

    6) Mists of Panderia release late this year (which isn't even mentioned) - The reason why there was cheering for the 10.2 million stable WoW numbers is because this is the time WoW numbers should be dropping drastically. With this new release we should see the number jump back up or at the very least stabilize. If you disagree.. please show me where this didn't happen for the previous releases? An eight+ year old game deserves HIGH praise for keeping subscriber numbers at remotely the number that WoW has for so long.

    7) ATVI targets the die-hard gamers and this base has held even or slightly grown (or greatly grown if you're looking at the e-sports market ie-Starcraft). It's the kids and casual game makers who have been hit by the shift to mobile gamingand casual gaming. This hasn't effected ATVI one bit and if someone could truly monitor digital sales I believe you would easily see this.

    8-10) Stock buyback. Tons of cash. Increasing dividends.

    I agree that there are risks and you're probably not going to hit a home run with this stock if you compare it to popular and/or fast growing companies.

    If ATVI doesn't continue to produce the same quality of games that they have in the past then this stock is toast but every time someone tells me ATVI is done for they end up innovating games and revenue streams that no one previously believed possible.

    Thanks for the PoV. Good luck!

    TLDR - I believe this article is skewered towards everything that can possibly be labeled in a negative light without considering all of the past successes, surprises and potential of ATVI.

  • Report this Comment On June 23, 2012, at 1:58 PM, AceOfSaves wrote:

    Thank you for those points, Scerabi. It makes me feel a lot better in holding on to my ATVI shares.

    I think you meant "skewed" instead of "skewered" though.

    Thanks again. Long ATVI!

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