Activision Blizzard's Forgettable Record-Breaking Year

The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending to the year. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the U.S. and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get lapped? First-half performances can hold some clues, so let's look to the recent past to find out whether Activision Blizzard (Nasdaq: ATVI  ) deserves a place in your portfolio going forward.

First-half recap
If you've been watching Activision over the last few years, you probably know the story of its stock moves in 2012. A huge game (or two or three) is released, gamers go nuts, and the market shrugs. Not even Diablo III could lift this stock out of its rut, as you can see here:

ATVI Total Return Price Chart

ATVI Total Return Price data by YCharts.

Here's a snapshot of its recent performance:

Market Cap $13.3 billion
TTM Revenue $4.48 billion
TTM Net Income $966 million
TTM Free Cash Flow $894 million
MRQ Revenue $1.17 billion
MRQ Net Income $384 million
MRQ Free Cash Flow $144 million
MRQ Revenue Change (YOY) (19.1%)
MRQ Net Income Change (YOY) (23.7%)
P/E 14.6
Forward P/E 11.1
Price to Free Cash Flow 14.4
Motley Fool CAPS Rating (out of 5) ****

Source: Morningstar. TTM = trailing-12-month. MRQ = most recent quarterly. YOY = year-over-year.

What the numbers don't tell you
Fool analysts Eric Bleeker and Jason Moser sat down at the end of 2011 to answer the question, "What will it take to move Activision?" Whatever the answer is, the market hasn't found it yet. For two years, Activision has underperformed the S&P 500, despite an impressive rise in net income:

ATVI Total Return Price Chart

ATVI Total Return Price data by YCharts.

More important considerations here are the stock's precipitous P/E drop and the worrying trend of diminishing free cash flow. Based on all the records Activision has been setting, you'd think that cash flow would be on the upswing. It's not the company's long-standing stock repurchase plan kicking into high gear, either; Activision's share buyback efforts have been declining since 2009.

What happened? World of Warcraft got old. Nearly 2 million people (and orcs, goblins, night elves, etc.) have left Azeroth since the end of 2010, leaving Activision with a still-sizable population of 10.2 million subscribers. Electronic Arts' (Nasdaq: EA  ) competing role-playing game, in comparison, has just 1.3 million active subscribers. NetEase.com (Nasdaq: NTES  ) , Activision's Chinese WoW operator, has also been suffering player attrition, but its other games have managed to pick up the slack.

Activision's Blizzard segment let go of 600 employees weeks after announcing its new population number. The market didn't care. The market hasn't particularly cared about anything Activision has done this year, despite the fact that some major things have happened. Call of Duty's next installment will arrive in November, as it tends to. Diablo III set sales records and then suffered a minor PR crisis when its "always-on" requirement wasn't supported by always-on servers on launch day. The game also unveiled Activision's new monetization strategy, which can be summed up thusly: "Let gamers buy things from each other with real money and take a 30% cut."

So far it seems Activision is content to stick with the PC-and-console-blockbuster strategy. It's not yet taking cues from EA and branching out into mobile and social games to compete with Zynga (Nasdaq: ZNGA  ) , which some of my colleagues have argued may be Activision's biggest threat. Nor has it yet gone Disney (NYSE: DIS  ) by becoming a multimedia entertainment powerhouse, as Jason Moser suggested last year.

Majority stakeholder Vivendi has recently been fishing for a buyer for its shares, which doesn't indicate a lot of faith in the company's long-term performance. I can't say I blame Vivendi. Activision is one of the few gaming companies with enough resources to really break boundaries, but it seems content to churn out franchise sequels on established formats instead. Compared to most of its peers (even Disney, which has its own mobile-gaming division), Activision seems like a lumbering dinosaur.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Walt Disney and Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Walt Disney, Activision Blizzard, and NetEase. 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.


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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 July 26, 2012, at 12:13 PM, lonewalker24 wrote:

    It really is sad that kotick has absolutely ruined a franchise that once excelled in game quality and flipped it for one that instead wants every penny you have in your wallet in return for a mediocre experience that drags the consumer under the bus hopelessly in the search for a truly submersive gaming experience. If you ask me the company deserves to tank and tank hard. They have seemingly un-nestled their quality assurance and replaced it with a department that is focused on a more moentized strategy of operation. I know it's all business in the end but a severe lack of forsight and balance in a company that used to be top dog in the industry is going to degrade them into yet another selfish money-grabbing institution centered ideally on how much they can make off of the consumer; rather than the quality of experience provided to said consumer. It is sad but I fear this company is only headed for a !@#$storm. Yes the company looks fine on paper. Check the stocks (ATVI). It's transparently obvious that the only thing keeping them remotely afloat is their current release sales and online subs. Once the online subs move elsewhere the company is likely to collapse. Thanks for making an industry about gaming and having fun into one that only cares about the consumers bank account. I had no idea it was this bad. Thank you so much for posting this article. I am convinced now more than ever to take my money elsewhere and never look back. Games shelled out from this company will never have the quality that they used to and because of that I will never purchase another game from blizzard again. I don't care how amazing it seems. Im sticking to sheer principle here and so should you. They are taking advantage of you. Wake up and realize it people.

  • Report this Comment On July 26, 2012, at 12:14 PM, lonewalker24 wrote:

    Sell your shares now while you have the chance

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