Why the Big Money Bet on Activision Blizzard Makes Sense

This valuation is just too cheap to ignore.

Tim Beyers
Tim Beyers
Feb 22, 2011 at 12:00AM

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Activision Blizzard (Nasdaq: ATVI). Are institutions bullish or bearish when it comes to this beleaguered video game publisher?

Foolish facts


Activision Blizzard

CAPS stars (out of 5) ****
Total ratings 6,990
Percent bulls 97.4%
Percent bears 2.6%
Bullish pitches 1282 out of 1346
Highest rated peers Shanda Games, Giant Interactive, Take-Two Interactive (Nasdaq: TTWO)

Data current as of Feb. 15.

Fools love Activision Blizzard about as much as they loathe it. Certainly they love the games. The Call of Duty series and World of Warcraft (WoW) have huge fan bases. On its own, WoW has more than 12 million subscribers. The latest in the Call of Duty franchise, Black Ops, sold 7 million copies in the first 24 hours of release in November.

The annual BlizzCon gaming convention in Anaheim, CA typically plays host to more than 20,000 fans of Blizzard's various online franchises -- WoW, StarCraft, and Diablo notably. With numbers like that, you'd think Activision Blizzard would be making money hand-over-first. You'd be wrong ... and right.

Let's dig into the bad news first. Activision Blizzard's 2011 earnings projection came in about $800 million less than Wall Street expected thanks to a restructuring that will, among other things, see the once-legendary Guitar Hero franchise come off tour. The stock sold off by 11% on the news. In the wake of a great earnings report from Take-Two Interactive, Fools were understandably disappointed.

"[Activision Blizzard] was great several years ago. Guitar Hero, Call of Duty, and World of Warcraft were their winners. The games won title after title and then they lost it. Guitar Hero has been beaten out by Harmonix, Bad Company has replaced Call of Duty, and World of Warcraft is losing market share quickly to games such as DC Universe Online. [Activision Blizzard] had its day but the fat lady is singing and the piper is piping," wrote Foolish investor unlearned earlier this month.

Fair points all. Facebook and Zynga have made social gaming the new New Thing and Time Warner (NYSE: TWX) used last year's Comic-Con to demo DC Universe Online and it does, indeed, look slick.

Institutional ownership history

Top Owners










Wellington Management Company





Davis Selected Advisors










RS Investment Management










Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

And yet you won't find many bears among the Big Money investors. Many of the top 25 institutions substantially increased their interests in Activision Blizzard last year, none more so than RS Investment Management.

In particular, the highly regarded RS Value (RSVAX) fund run by a team led by Andrew Pilara, Jr. upped its stake in the company by close to 6% in the quarter ended on Dec. 31, Morningstar reports. Other top institutional owners include Chris Davis of the Davis family of funds and the market-beating team at Vanguard PRIMECAP (VPMCX).

Competitor and peer checkup


Institutional Ownership

Insider Ownership

Activision Blizzard 33.84% 0.76%
Electronic Arts (Nasdaq: ERTS) 96.91% 0.51%
Nintendo 35.44% 11.09%
Microsoft (Nasdaq: MSFT) 64.48% 4.04%
Take-Two Interactive 84.57% 1.02%

Source: Capital IQ. Data current as of Feb. 21.

At first glance, this ownership profile looks enticing. Big Money buyers haven't committed to the stock in the way they've committed to peers EA and Take-Two. But don't be deceived; the numbers don't take into account the 59% of the company that Vivendi owns as of this writing.

And yet with more than $3.5 billion in cash on its books and trading for less than half the cash flow multiple it earned during 2009, Activision Blizzard looks attractive to me. It's as if all the perma-bears came out of hibernation at once, with each one howling about how the company will never again captivate the market with an innovative franchise.

I think they're crazy, and I'm willing to put my money where my mouth is. I've already rated the stock to outperform in CAPS and I'll be opening a small real-money position in the stock as soon as disclosure rules allow.

Do you agree? Disagree? Let me know you would rate Activision Blizzard using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Activision Blizzard, Electronic Arts, Microsoft or Take-Two Interactive to your watchlist.