The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Activision Blizzard (Nasdaq: ATVI).

The Diablo made me do it
Shares of the world's leading video game company have been meandering in the pre-teens for most of the past three years.

The stagnancy makes sense. Video game industry sales have also been sluggish over the past three years. Diehard gamers are still loyal, but mainstream audiences have moved on to cheaper and casual diversions.

There's a wide range of opinions around Fooldom when it comes to Activision Blizzard. It's a popular recommendation in some of our newsletter services. The compelling valuation and its 1.5% yield are attractive to many of my fellow Fools. Alex Planes disagrees with my theory about casual and social gaming eating into traditional video game sales, but where are the gamers?

Activision Blizzard is still the top dog here, but it's hard to get excited about the company outside of its annual Call of Duty updates. Last month's debut of Diablo III was supposed to be a needle mover, but server outages have taken a karma-sized chomp out of the publisher's decision to require connectivity for its play modes.

We've also seen millions of gamers defect from its World of Warcraft juggernaut. Bulls cheered when the online game closed out its latest quarter with 10.2 million players -- sequentially flat after several periods of declines -- but there's more to that particular story. Several months ago, Activision Blizzard offered to give anyone committing to a year of World of Warcraft some free virtual goodies and a free digital copy of Diablo III. That's a $60 game, folks, making this a desperate deal which is essentially paying for eight months to get a full year.

Adding salt to the wound, Electronic Arts (Nasdaq: EA) shed 400,000 virtual jedi warriors on its relatively new Star Wars: The Old Republic game during the same quarter. Where did they go? Shouldn't they have been wooed by Activision Blizzard's devilish promotion?

Let's go to the tape. Analysts see Activision Blizzard's revenue climbing by a mere 2.1% this year and 2.6% next year. This is a company barely keeping up with inflation, and Wall Street may be a bit generous here. It will take several years before all three consoles have sizable audiences for their next-gen consoles, and along the way, it will be splintering fan bases across older and new platforms that may not be compatible. It's against this backdrop that smartphone and tablet sales are booming, giving gamers playing devices where Activision Blizzard is way behind the curve.

Activision Blizzard may be cheap, but it's cheap for a reason.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • Apple (Nasdaq: AAPL): Even before all of this week's WWDC 12 goodies, the world's most valuable technology company has set itself as a casual gaming hub through its App Store. There will always be people willing to spend $60 on Diablo III instead of buying 60 $0.99 apps, but the emerging marketplace can't be ignored. Rovio's Angry Birds Space has been downloaded more than 100 million times in three months across Android and Apple's iOS devices. Something important is happening here. Apple and Activision Blizzard are both fetching less than 11 times next fiscal year's earnings, but the class act of Cupertino is the one really growing nicely here.  
  • Take-Two Interactive (Nasdaq: TTWO): The publisher of renegade video games hasn't been much of a player lately. Revenue fell 19% in its latest quarter, and its deficit widened sharply. However, we know that Grand Theft Auto V is coming sooner rather than later. EA and Activision Blizzard are starving organically, and Take-Two has to be a no-brainer acquisition target. Take-Two's guidance calls for an adjusted profit per share of $2.00 to $2.25, which means that even a buyout in the mid-$20s would be accretive to either EA or Activision Blizzard.
  • Microsoft (Nasdaq: MSFT): Of the three console platforms, Microsoft's Xbox 360 has set itself apart from the pack. Mr. Softy has a growing user base of premium-paying connected gamers, and it's been offering more services to its players beyond games. The console has become the centerpiece of home entertainment, and that means more time devoted to things other than gaming. Microsoft's leading the way here, and its stock is also dirt cheap here.

Longtime Fool contributor Rick Munarriz does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Microsoft. The Fool owns shares of and has written calls on Activision Blizzard. The Fool owns shares of Apple. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Google, Apple, and Microsoft. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. 

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