3 Reasons to Buy Activision Blizzard

Unless you make cereal, you usually don't sell a million copies of your product over a weekend. The mere fact that Activision Blizzard (NASDAQ: ATVI  ) was able to move 1.1 million copies of StarCraft II: Heart of the Swarm in the first 48 hours says something about the company's customers -- two things, if we're counting. First, that they're dedicated followers of the brand and the products. This wasn't even a new product, it was an expansion to an old one. That implies that well over 1.1 million people own that original product.

Second, it highlights the cash that the company is capable of pulling in because of its brand strength. The expansion retails for $40, meaning that StarCraft made more money that week than most movies at the box office did. While having a hot product isn't reason enough to invest in a company -- see "pet rock" -- it's not a bad reason to look into a business. Here are three solid reasons to get on board with Activision Blizzard.

It makes money
Sometimes you sell a lot of those Nooks and still don't make any money, but Activision isn't playing that game. The company earned $4.8 billion in revenue last quarter, resulting in earnings per share of $1.01. That has enabled the company to announce a $0.19 dividend payable in May, and might result in some share repurchasing, as well. The success came from the popularity of two major franchises -- Call of Duty and Skylanders -- which ran at the top of the U.S. charts for much of the year.

Activision has been very successful at making the most out of its subscribers, earning revenue at every possible turn. The two I want to highlight are World of Warcraft, a subscription-based game boasting over 9.5 million users, and Skylanders, a video game that interacts with collectible figurines. At the end of last year, Skylanders had generated over $1 billion in worldwide sales.

Last year, the company ran a healthy operating margin of 40%, which compares favorably to Electronic Arts (NASDAQ: EA  ) , which has been running at an operational loss. Activision has been judicious with its cash as well, generating a free cash flow of $1.3 billion over the last year. That's the sort of financial stability that allows the company to really play with how it generates money -- the second big reason to buy Activision.

It makes money in new and intelligent ways
The company has been a front-runner in both the microtransaction and subscription spaces. Activision generated 34% of its revenue in subscriptions and licensing fees last year. That's a fantastically sticky source, and it allows the company to try new things -- like selling collectible toys. Skylanders was a stroke of marketing genius, and it has allowed the company to release popular new content in big batches. With each new game comes a whole host of new toys for kids to collect. But to keep parents happy, Activision has also put in a good deal of compatibility between the games and action figures. Skylanders also has a mechanism for playing with your figures on a friend's machine, and they can work across different gaming platforms, ensuring that kids can play with one another.

Activision has also been doing well with sales of its downloadable content. Customers like that they don't have to purchase a whole new game, while the company is able to earn incremental revenue without having to develop a whole new title. The Call of Duty franchise has performed especially well, with Activision reporting that sales are ahead of projections so far this year.

It has interesting new content on the horizon
The final -- and possibly best -- reason to buy Activision is that the company has a good-looking year lined up. Just last week, it announced a new collectible game using the World of Warcraft properties but in digital card form. The combination pulls together gamers' desire to collect, and their love of World of Warcraft. The title is called Hearthstone: Heroes of Warcraft and it's free-to-play. That means that you can get in for nothing down, but make optional purchases in the game in order to make your deck of cards better. The system has been increasingly popular with developers, and Activision's use with the World of Warcraft name should be a big winner for 2013.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.


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