3 Reasons to Expect a Blizzard Later This Year

Huge releases, more digital sales, and better margins, but what have you done for me lately?

Jun 18, 2014 at 3:00PM

The gaming industry is the perfect example of a business where you are only as good as your last hit. Given the strength of sales momentum behind both the Xbox One and the PlayStation 4, publishers are being set up for a very good year. Activision-Blizzard (NASDAQ:ATVI) has multiple potential hits coming out, and there are at least three reasons to believe the winter of 2014 could produce an avalanche of sales and earnings growth for the company.

These digits add up to profits
One reason Activision-Blizzard investors should be excited about the company's future is because of the company's current performance. In the last few months, the company hasn't released a massive hit and yet based on operating margin, Activision-Blizzard leads its peers.

In the last quarter, three of the larger game publishers in North America witnessed declines in revenue. Not only did Activision-Blizzard suffer, but peers like Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO) also witnessed revenue declines.

If you are looking for a long-term investment, always check how the company performs when sales aren't so hot. The fact that Activision-Blizzard had the highest operation margin of its peers during this period is impressive.

Last quarter, Activision-Blizzard's operating margin was just over 38%. By comparison, EA's margin was about 31%, and Take-Two actually reported a negative margin. One of the reasons Activision-Blizzard carried a higher margin is because the company gets relatively more of its sales from digital than its peers.

In fact, during this last quarter Activision-Blizzard generated almost 70% of its sales digitally compared to 60% at EA, and 43% at Take-Two. When you sell more of your wares digitally, your costs are lower so Activision-Blizzard's higher margin makes sense. Given this outperformance in a tough environment, it's hard not to get excited about the company's potential when sales pick up later this year.

An important win
The second reason Activision-Blizzard could report strong earnings in the future is the company appears to understand how to expand its existing franchises. One of the cornerstones of Activision-Blizzard's business is the World of Warcraft franchise. With millions of subscribers this game forms one of the legs that holds up Activision-Blizzard's profits.

In a new development, the company released Hearthstone: Heroes of Warcraft, which is an extension of the World of Warcraft business. Activision-Blizzard understands that certain types of games work well on mobile and others do not.

For instance, EA's Madden for mobile is plagued by a difficult control scheme. On the other hand, EA's Monopoly, Tetris, and others rank in the top 50 paid games on the iPhone. Take-Two's Grand Theft Auto: San Andreas currently is in the top 30 top paid iPhone apps.

The point is, Activision-Blizzard knows that the whole World of Warcraft experience would be challenging on a small screen, but a card based game works well. If the company can offer complimentary mobile games for Call of Duty, Diablo, and Skylanders, Activision-Blizzard's revenue stream could diversify even further.

Good luck to the others
The third reason to expect a blizzard of revenue growth from Activision-Blizzard, is the company could own the fall and winter when it comes to game sales. Most game publishers push their biggest releases to the end of the year.

Electronic Arts has releases like its annual Madden, NHL, and NBA updates. Take-Two will have to go big to match the popularity of its Grand Theft Auto V release from last year. However, neither of these publishers has a lineup to match Activision-Blizzard.

The publisher has new games or expansions of Call of Duty, Skylanders, Diablo, and World of Warcraft coming between October and the end of the year. In addition, Destiny from the creators of Halo is expected in the fall as well.

Given that Activision-Blizzard carries a higher margin than its peers, and is expanding its popular franchises into mobile, these new releases should be just the icing on the cake. Last year was a bit tough for Activision-Blizzard shareholders, but 2014 looks like a snowstorm of profits could be headed their way.

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Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard. 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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