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3 Things to Watch With Activision Blizzard

Activision Blizzard (Nasdaq: ATVI  ) is a perennial chart-topper in the video-game industry, and this year was no different. Diablo had a monster launch, and Activision's foray into toy-based gaming with Skylanders has also been a smashing success. Yet the company's shares are flat:

ATVI Total Return Price Chart

ATVI Total Return Price data by YCharts

Investors have been waiting for this stock to grow for a long time. What will it take to move Activision? Will the company finally break through a difficult plateau, or will it be doomed to long-term decline? There are a few key issues that will determine Activision's future. Let's look at the three most important ones now.

1: Can Activision's largest franchises resist long-term decline?
When I covered Activision's second-quarter earnings, I noted the steep drop in World of Warcraft subscribers since the release of its latest expansion pack. That wasn't the only worrying trend at the time, as pre-orders for the latest Modern Warfare were running behind its predecessor at identical times in their pre-release cycle.

Since then, the gap between Black Ops II and Modern Warfare 3 in pre-orders has only grown larger. With 12 weeks to go before launch, Black Ops II now has 647,000 pre-orders for Microsoft's (Nasdaq: MSFT  ) Xbox 360, compared with Modern Warfare 3's 839,000 pre-orders at the same point before its launch. The PlayStation 3 version of MW3 is running ahead of its PS3 predecessor by 68,000 copies, but the cumulative tally still shows more than 100,000 fewer orders.

Activision has two big titles. WoW has lost nearly 3 million subscribers, and unless Modern Warfare's pre-order trend doesn't correlate to weaker launch sales, it seems certain that its latest title will be the first to fall short of its predecessor. These titles need to hold up for Activision until it can build a new blockbuster. And speaking of which …

2: When will Activision create another huge blockbuster? Can it?
Skylanders was a coup for Activision. Sparking a toy craze can bring massive windfalls, as Beanie Baby creator and multibillionaire Ty Warner can attest. Thus far, the game has been very successful -- industry tracker VGChartz tallies 3.6 million games sold worldwide. That doesn't include the purchase of any additional Skylanders collectible figurines, which can provide a steady stream of extra income as long as the game's audience stays hooked.

However, Skylanders hasn't yet nudged Activision's key metrics in a positive direction. Revenue has been flat for years. Net income has ticked lower after a consistent multiyear rise. Free cash flow is trending higher but remains below highs set at the end of 2010, when the last WoW expansion was released.

ATVI Total Return Price Chart

ATVI Total Return Price data by YCharts

To generate growth, Activision probably needs another blockbuster. Skylanders was the first non-sequel blockbuster the company's released in years. If the company doesn't have an ace up its sleeve, there's probably little reason to expect much growth in the future.

3: Can Activision win without mobile and social?
Activision has yet to embrace mobile and social gaming like Electronic Arts (Nasdaq: EA  ) or Zynga (Nasdaq: ZNGA  ) , but based on those companies' performances of late, such a move may not be particularly wise.

Zynga's unprofitability, despite more than $1 billion in annual earnings, shows that producing social titles can still be tremendously costly, but Activision's current monetization strategy may be ideally suited to the medium. Premium subscriptions in Call of Duty, player-to-player item sales in Diablo, and vanity item sales in WoW are all examples that could easily be applied to a smartphone or browser-based game. The problem is in creating the game that's sticky enough to keep users around.

Facebook (Nasdaq: FB  ) has been a notoriously fickle medium to develop for. Zynga's The Ville (a clone of EA's The Sims Social) is already bleeding users, and The Sims Social, which was once a leading Facebook game, now dawdles below a number of Zynga titles on the activity charts. Mobile gaming is far from a slam dunk, either, as Zynga's disastrous buyout of Draw Something developer OMGPOP showed.

However, Activision's core market of PCs and consoles may not be a long-term winner. The Xbox, along with other consoles, has faced dwindling sales as its life cycle draws to a close. A virally popular Kickstarter-funded console startup could further shift the gaming consumer toward low-cost open-source systems. PC-based online games are actually in decline, as the total number of massively multiplayer gaming accounts has been shrinking since 2010.

At the Fool, we encourage investors to think about the long term. Activision Blizzard's executives have done well in shifting its business model toward digital sales, but that alone doesn't create growth. The company may have to take some big risks in the near future to push its earnings potential higher. A company content to ride its franchises to the ground doesn't make a very compelling investment.

The video-game industry is going through turbulent times. If you're an investor in any of the major companies, it's important to stay updated to see how companies are navigating an era when gamers are changing tastes and growth is hard to come by. We've created a series of premium research reports on different companies with a toehold in the gaming space. Each report comes with not only a writeup by one of our top analysts, but also continuing updates and guidance on the companies. Just follow any of the links below to get started.

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 Facebook and Microsoft. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Facebook, and Microsoft, creating a synthetic long position in Activision Blizzard, and creating a synthetic covered call position in Microsoft. We Fools don't 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. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (0)

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 September 03, 2012, at 1:26 AM, jacobandersen72 wrote:

    ATVI should have made a free call of duty MMO

    big mistake

    competitors are coming to take over the market from them

  • Report this Comment On September 04, 2012, at 2:07 AM, chrisguns521 wrote:

    So much misinformation. This must have been written a month ago.

  • Report this Comment On September 04, 2012, at 3:15 AM, XMFBiggles wrote:

    @ chrisguns521 -

    You're welcome to point out any misinformation you can find. Otherwise, how do you expect us to fix it?

    - Alex

  • Report this Comment On September 04, 2012, at 6:08 PM, Chainsmoke wrote:

    Last week they implemented changes to the game in advance of the Pandas of the Mist expansion. A lot of big changes to the core of the game, that from what I can see will lose them subscribers.

  • Report this Comment On September 05, 2012, at 8:11 AM, XMFBiggles wrote:

    @ Chainsmoke -

    Care to elaborate?

    - Alex

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