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 (Nasdaq: ATVI), a maker of popular console games such as Guitar Hero and Call of Duty, as well as the owner of the worldwide phenomenon known as World of Warcraft. It's been a great business for years. So good, in fact, that David Gardner's original pick for Motley Fool Stock Advisor had more than tripled as of this writing.

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 (Nasdaq: ERTS)

Not applicable

Giant Interactive (NYSE: GA)

5.6%

Microsoft (Nasdaq: MSFT)

8.1%

Nintendo (Other OTC: NTDOY.PK)

(12.9%)

Take-Two Interactive (Nasdaq: TTWO)

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.