Here's Why Activision Blizzard, Inc. Looks Like a Good Buy Even at 52-Week Highs

Activision is enjoying solid tailwinds as a result of the new console cycle, and the good times are far from over.

Jul 17, 2014 at 1:00PM

Activision Blizzard's (NASDAQ:ATVI) shares have gained around 29% so far in 2014. Microsoft (NASDAQ:MSFT) and Sony's (NYSE:SNE) latest consoles, and a slate of impressive games, have pushed Activision to 52-week highs. The game publisher's first-quarter results exceeded consensus estimates, driven by solid sales of Diablo III: Reaper of Souls and Call of Duty: Ghosts.  

Activision, however, looks expensive after its solid run up this year. It is trading at almost 26 times last year's earnings, exceeding the industry average of less than 20. At these levels, is there upside left in Activision?

Billion dollar franchises
According to management, Activision currently has the most valuable entertainment franchises and online communities in the world. In the current fiscal year, Activision is on track to extend its portfolio further by launching more games.

Its latest Call of Duty installment has delivered solid sales, becoming the No. 1 franchise on the PlayStation 4, or PS4, and Xbox One consoles. Activision is now working on the next version of this game, Call of Duty: Advanced Warfare, which is slated for launch later this year.

According to Activision, this game took around three years to develop. It wanted to ensure that the next iteration of its most valuable franchise gets cutting-edge graphics, an engaging storyline, new gameplay mechanics, and is high on the fun-to-play quotient. 

After the success of Call of Duty: Ghosts, which raked in $1 billion in sales on its first day, and outperformed Take-Two's GTA V, Activision is leaving no stone unturned in making its next version a resounding success. Activision also plans to bring Call of Duty to Chinese gamers in partnership with Tencent. This will be a PC-based free-to-play game in a format customized for the Chinese market.

However, Activision is not putting all its eggs in one basket. The company has reportedly invested $500 million in Destiny, which it expects to be its next new $1-billion franchise. Destiny is a first-person shooter game that essentially combines Call of Duty's game play with World of Warcraft's online mechanism, which is another successful Activision franchise.

Destiny is an online game that can be played with other players. Additionally, it has the pace and excitement of an action game. The game has generated much excitement, and Activision claims that pre-orders for the game are on track to set an industry record for a new franchise. 

Some more catalysts
Apart from these two expected blockbusters, Activision has other games that are driving its growth. Hearthstone: Heroes of Warcraft and Diablo III: Reaper of Souls are growing at a terrific pace. Hearthstone has already registered more than 10 million PC players, and is delivering robust engagement and monetization. Diablo III, meanwhile, became the No. 1 PC game in both North America and Europe in the first quarter, and sold through more than 2.7 million copies globally. 

The robust start of the latest console cycle is another tailwind for Activision. The current consoles are selling at a faster rate than peers, and this trend is expected to continue. So far, Sony has sold more than 9 million PS4 units, while Microsoft's Xbox One is trailing at 5 million units. By the year-end, PS4 sales are expected to hit 12 million, while the Xbox One is estimated to move 9 million units.

Sony and Microsoft are in healthy competition in the gaming console segment, and this is beneficial for Activision. The lower price of the PS4 and its worldwide availability has helped Sony take the lead in the market. Consequently, Microsoft is raising its game, as it plans to launch the Xbox One in another 29 countries from September. As more players will get access to the newer-generation consoles due to Microsoft's move, sales of Activision's games will increase.

Final words
Apart from having bright prospects, Activision also has an enticing valuation. It trades at a trailing P/E ratio of 26 while its forward P/E is around16. This indicates that its earnings will improve in the future. Further, Activision also pays out a dividend yielding 0.90%. This might not look like much, but Activision's payout ratio is quite low at 20%, and the company's cash flow is strong. It generated $1.1 billion in operating cash flow in the last year, so there's a good chance that it might increase the dividend going forward. Finally, Activision has a robust pipeline that should help sustain the growth momentum.

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Yaggyaseni Mittra has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Apple. The Motley Fool owns shares of Activision Blizzard, Apple, and Microsoft. 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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