Activision Takes Gaming Seriously

Like the games they make, software developers find themselves fading in and out of fashion on Wall Street. While Activision (Nasdaq: ATVI  ) is certainly closer to its highs than its lows these days, the stock has gone pretty much nowhere since the beginning of the year.

While some investors have tied themselves into knots wondering whether Electronic Arts' (Nasdaq: ERTS  ) struggles presage trouble for the entire industry, Activision has gone on doing business as usual.

Fourth-quarter results were OK. Revenue climbed 25%, but margins were hurt by a greater percentage of co-publishing in the total, and operating expenses in total climbed about 31%. Without the boost provided by interest and investment income and a tax credit, the company would have posted a quarterly net loss.

On the positive side, the company did post $200 million in free cash for the trailing 12 months and a heady 45% return on invested capital. Activision ended its fiscal year with nearly $4 a share in cash on the balance sheet.

The near future looks like a mixed blessing. The company has a major slate of new games coming out over the next 12 to 18 months (including many sequels to popular titles), but neither company guidance nor analyst expectations point to major year-over-year earnings growth.

I see reasons to be positive, however. The company is making steady progress on margins, and management seems to have a clear sense of focus and pragmatism. Activision isn't looking to challenge Electronic Arts on its home turf of sporting games (unlike Take-Two Interactive (Nasdaq: TTWO  ) . Rather, management seems to have adopted the philosophy of General Electric, focusing on markets where they can be a profitable No. 1 or No. 2.

In addition, the company is warming up to newer ideas. Activision has not historically been a major player in handheld games (in part because of the lower margins), but the next generation of systems seems to offer better margins, and the company is getting into the game. What's more, Activision continues to experiment with subtle revenue-boosting ideas like advertising and product placement within games.

In my opinion, Electronic Arts' only serious trouble is the probability that it is losing share to the likes of Activision, Take-Two, and THQ (Nasdaq: THQI  ) . Both Activision and THQ have now both reported fairly decent earnings for their respective quarters.

The gaming world will still have its ups and downs, and the stocks will fluctuate with Wall Street's perceptions of blockbusters, flops, and scheduling delays. Nevertheless, Activision has posted truly impressive growth over the years. While earnings momentum may be on "pause" for the coming year, Activision's current valuation makes its stock worth some consideration.

For more fun and games with fun and games:

• Attack of the Consoles
• Activision's 360 Degrees of Fun
• Take-Two's a Big Bully
• Time Warner's Up to Old Games

Whether "arcade game" makes you think of Pong, Pac-Man, or Mortal Kombat, we've got the place for you on our Computer & Video Gamers discussion board.

Activision was aMotley Fool Stock Advisorpick in 2002 and 2003. Want to find more great stocks with the potential to beat the market? Sign up for a no-risk subscription today.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).