"The bright side is that it probably can't get much worse from here." That's how my fellow Fool, Jeff Hwang, summed upActivision's (NASDAQ:ATVI) fiscal third-quarter 2006 earnings report back in February. Tomorrow afternoon, we'll see how accurate that assessment was, when Activision returns to Wall Street to report its fiscal Q4 2006 numbers.
What analysts say:
- Buy, sell, or waffle? Twenty-six analysts play Activision, and most of them love it. The stock scores 18 buy ratings, seven holds, and only one sell.
- Revenues. Analysts expect Activision's quarterly sales to tumble 36% versus last year's Q4, to $131.4 million.
- Earnings. The year-ago profit should yield an $0.08-per share loss.
What management says:
In reviewing Activision's third-quarter results, CEO Robert Kotick boasted that his firm was recently rated the "No. 2 overall software publisher in the U.S. and . the No. 1 market share publisher for the Xbox 360." Unfortunately, gaming software is in the midst of one of its "transition" periods, as the major console makers go through their latest round of equipment upgrades. And being No. 1 or 2 in an industry nearing the bottom of a cycle is not all that impressive.
What management does:
Consumers anticipating a new gaming console's imminent arrival are less likely to want to spend money on Activision games that are designed for the console that's about to be replaced. As a result, the company has to slash prices on existing games in order to move product. This strategic, but unavoidable, move has contributed to Activision's gross margins falling nearly 600 basis points over the last 18 months. Also, as Jeff pointed out, marketing and product development costs have been skyrocketing, resulting in even worse results on operating and net margins.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
43 |
40.8 |
39.9 |
37.4 |
36.7 |
37.3 |
|
Op. |
14.4 |
14.1 |
13.1 |
10.8 |
7 |
4.4 |
|
Net |
10.2 |
10.4 |
9.8 |
8.6 |
6.2 |
3.7 |
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.
One Fool says:
Is this the kind of performance that deserves a recommendation from the Fool's flagship investing newsletter, Motley Fool Stock Advisor? Indubitably. Because as Stock Advisor co-analyst David Gardner wrote in the January update to members, Activision's problems are "near-term" and contingent on two factors. One is the plan to reduce selling prices on soon-to-be-obsolete Nintendo and Sony gaming consoles, and the other is the fact that the one new console that is on the market, Microsoft's (NASDAQ:MSFT) Xbox 360, doesn't have as big a user base as do Nintendo's and Sony's fans.
David explains: "Any hiccups with the rollout of new gaming platforms should be minor in comparison to the strong organic growth ahead," which is why we still think the stock is a buy. Whatever tomorrow's numbers might suggest, Activision has a bright future ahead of it. If you're interested in seeing the full write-up for Activision and all other recommendations in the newsletter, click here to take a free 30-day guest pass.
Competitors:
- Atari (NASDAQ:ATAR)
- Electronic Arts (NASDAQ:ERTS)
- JAKKS Pacific (NASDAQ:JAKK)
- Midway Games (NYSE:MWY)
- Take-Two Interactive (NASDAQ:TTWO)
Electronic Arts and Activision are Motley Fool Stock Advisor picks.
Fool contributor Rich Smith does not own shares of any company named above.
