I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus -- hence this regular series. We'll be taking a closer look at many of the market's great growth stocks, to see which of them show real, numerically relevant signs of sustainability.
Next up in our series is Activision Blizzard
Foolish facts
Metric |
Activison Blizzard |
---|---|
CAPS stars (out of 5) |
***** |
Total ratings |
6,483 |
Percent bulls |
97.8% |
Percent bears |
2.2% |
Bullish pitches |
1,203 out of 1,248 |
Highest rated peers |
Dynamics Research, AUTONOMY, Qlik Technologies |
Data current as of Sept. 2.
Fools are as fanatical about Activision Blizzard's stock as they are its games. "The other day I was at jury duty and as I was coming back for lunch, the two security guards barely noticed me as I came through the metal detector. They were engrossed in Warcraft. That male-bonding ritual that substitutes for stock talk and sports gossip for a certain portion of the 18-45 male demographic," wrote Foolish investor johnnykillz recently.
While not exactly reassuring for judges and jurors, this is the sort of singular loyalty that can make for outstanding stock returns. The question is whether Activision Blizzard can parlay this loyalty into a continuing growth story.
The elements of growth
Metric |
Last 12 Months |
2009 |
2008 |
---|---|---|---|
Normalized net income growth |
130% |
Not material |
Not material |
Revenue growth |
3.8% |
41.4% |
124.3% |
Gross margin |
50.4% |
46.1% |
39.2% |
Receivables growth |
(32.6%) |
(24.1%) |
769.6% |
Shares outstanding |
1,224.4 million |
1,268.3 million |
1,324.4 million |
Source: Capital IQ, a division of Standard & Poor's.
Answering that question gets difficult, given the data in this table. Let's review:
- Activision Blizzard is a cyclical business that earns cash from new releases. As such, studying revenue and net income isn't likely to tell us much. To be fair, revenue gains were partly due to comparing the new Activision Blizzard with its pre-merger self. (Activision and Vivendi Games merged in mid-2008.)
- Yet there's good news in the table. Management has used Activision's generous cash flows wisely, buying back shares and instituting a dividend that pays 1.3% as of this writing.
Competitor checkup
Competitor |
Normalized Net Income Growth (3 yrs.) |
---|---|
Activision Blizzard |
Not applicable |
Electronic Arts |
Not applicable |
Giant Interactive |
5.6% |
Microsoft |
8.1% |
Nintendo (Other OTC: NTDOY.PK) |
(12.9%) |
Take-Two Interactive |
Not applicable |
Source: Capital IQ.
If anything, this table says that video games are a more mature business than any of us would like to think. But should we really be surprised? I'm in my 40s now, and I grew up playing video games.
Grade = unsustainable
Maturity works against Activision Blizzard in this test, but I'm not sure it matters. At 13.9 times next year's expected normalized earnings, the stock is reasonably priced, while the dividend adds a layer of protection against sustained losses. This may no longer be a growth story, but it's still a good story.
Now it's your turn to weigh in. Do you like Activision Blizzard at these levels? Would you make it one of our 11 O'Clock Stocks? Let the debate begin in the comments box below. When you're done, click here to get today's 11 o'clock portfolio pick.