Has Activision Blizzard Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Activision Blizzard (Nasdaq: ATVI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Activision Blizzard.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

30.1%

Pass

 

1-Year Revenue Growth > 12%

(7.6%)

Fail

Margins

Gross Margin > 35%

61.8%

Pass

 

Net Margin > 15%

18.5%

Pass

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

2.92

Pass

Opportunities

Return on Equity > 15%

7.8%

Fail

Valuation

Normalized P/E < 20

20.91

Fail

Dividends

Current Yield > 2%

1.7%

Fail

 

5-Year Dividend Growth > 10%

NM

NM

       
 

Total Score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful; Activision Blizzard started paying a dividend in February 2010. Total score = number of passes.

Since we looked at Activision Blizzard last year, the company got back the point it lost from 2010 to 2011, with net margins improving despite a drop in revenue. The stock hasn't been celebrating, though, with a 15% drop over the past year.

Activision has faced a tough environment for game development companies, but despite disappointing performance, it's avoided the fate that many of its peers have suffered. Both Electronic Arts (Nasdaq: EA  ) and Take-Two Interactive (Nasdaq: TTWO  ) have seen much bigger share-price declines as the entire industry begins to suffer from old franchises that are getting long in the tooth, as well as heightened competition.

For Activision, its World of Warcraft cash cow has started suffering customer defections, as subscriber counts have fallen by a quarter in less than two years. Black Ops II pre-orders had also been trending behind previous launches, although GameStop (NYSE: GME  ) said earlier this month that the game had broken its previous pre-order record.

Still, Activision has done well to make the most of what it has. By moving toward digital distribution, it's aiming to head off Zynga (Nasdaq: ZNGA  ) and other online-focused game developers that thrive on instant gratification. Its latest Skylanders franchise could also be poised to replace lost revenue from other series.

For Activision to keep improving, it needs to find ways to get its revenue moving in the right direction. New blockbusters will be essential to that process, and if it can boost its earnings to justify its somewhat rich valuation, then Activision could quickly move toward a perfect score in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

As relatively strong as Activision has been, Zynga's post-IPO performance has been dreadful, and investors are beginning to wonder if it's "game over" for this newly public company. Being so closely related to the world's largest social network can be a blessing and a curse. You can learn everything you need to know about the online game maker and whether Zynga's a buy or a sell in our latest premium report. Don't even think about picking up shares before you read what our top analysts have to say about the company. Click here to access your copy.

Click here to add Activision Blizzard to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard, Electronic Arts, and GameStop. Motley Fool newsletter services recommend Activision Blizzard, Electronic Arts, GameStop, and Take-Two Interactive. 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.


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