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2 Big Reasons to Buy Activision Blizzard

By Steve Symington - Mar 9, 2013 at 4:45PM

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Activision Blizzard is up more than 40% so far in 2013. Here's why it's still a buy.

Thanks largely to the positive fallout from its incredible fourth0quarter earnings report last month, shares of gaming specialist Activision Blizzard (NASDAQ: ATVI) are up more than 40% so far this year, finally ending a nearly three-year cycle of relatively flat trading during which the market refused to take note of the gaming stalwart's industry prowess. 

Does this mean, then, that prospective investors have missed the boat? Absolutely not.

To the contrary, investors should have every reason to believe Activision will continue its impressive rise. Fool.com co-founder David Gardner regularly recognizes that winning businesses tend to keep on winning, and in 2012, Activision posted its strongest-ever year, setting records for both GAAP net revenue of $4.86 billion and earnings per share of $1.01.

With that, here are two other big reasons you should consider making Activision part of your portfolio.

All that cash
First of all, Activision managed to generate massive operating cash flow of more than $1.3 billion in 2012. While Activision's most recent results were certainly helped by unusually strong holiday sales of its games, the company has managed to generate a total of more than $4.8 billion of operating cash flow over the past four years.

In addition, Activision remains intent on returning capital to patient shareholders, as evidenced by its spending $3.8 billion since 2009 on dividends and share repurchases. In fact, just last month the company increased its annual dividend for the third year in a row to its current level of $0.19 per share.

Even so, noting that the company began 2013 with $4.4 billion in cash on its books -- more than a quarter of its entire market capitalization, mind you -- Activision CFO Dennis Durkin still isn't content with the company's efforts to create shareholder value. During the most recent earnings conference call, Durkin said the company "may consider [additional] substantial stock repurchases dividends, acquisitions, licensing, or other non-ordinary course transactions and significant debt refinancing."

Domination where it counts
Next, while the rest of the world seems obsessed with mobile's so-called "freemium" games -- of the Angry Birds variety with which Zynga (ZNGA) built its name -- it's easy to forget that companies such as Zynga struggle mightily only to eke out meager profits.

Meanwhile, Activision doesn't need to resort to playing online poker to stay afloat. Instead, it's happy to continue focusing on the tiny details that make its massively popular full-featured games truly great, helping it to dominate the truly profitable core gaming markets.

How, then, does Activision maintain its edge over competitors such as Electronic Arts (EA 1.65%) and Take-Two Interactive (TTWO 1.75%)? Rather than relying primarily on the initial sale of its games for profit as EA (with its many sports-centric titles) and Take-Two (with its Grand Theft Auto franchise) do, Activision enjoys massive, predictable streams of recurring subscription revenue from wildly popular games such as World of Warcraft, which boasted more than 9.6 million monthly subscribers at the end of 2012.

Naturally, then, even after all those buybacks and dividends, Activision still has plenty of money left over to further invest in its world-class portfolio of game franchises, which, in addition to World of Warcraft, includes blockbusters such as Call of Duty, Starcraft, Skylanders, and Diablo III, the last of which broke PC gaming records by selling more than 12 million copies from its launch last May through the end of the year.

What's more, Activision continuously strives to ensure that its pipeline remains stuffed with up-and-coming cash-generating machines. As a result, the pipeline not only includes future iterations of its existing franchises such as its coming Call of Duty Online product aimed at the Chinese gaming market, but it also features ambitious new products such as Blizzard's next-generation massive multiplayer online Titan project, which itself continues to spur countless rumors and fan sites well in advance of its official release. Further still, excitement for Activision's new "genre-defining" Bungie Destiny MMO seems to be reaching a fever pitch as the studio continues to recruit "hundreds of thousands" of beta testers to explore the novel digital world.

Foolish final thoughts
If you're looking for an 800-pound gorilla in the gaming world, look no further than Activision Blizzard. Not only does the company generate boatloads of cash, but its developers also consistently demonstrate an unrivaled ability to create awe-inspiring, forward-looking game franchises that ensure its place atop a mountain of seemingly talented challengers in the industry.

What's more, even after the recent pop, shares of Activision still trade at less than 15 times trailing earnings. If you back out its cash, its price-to-earnings ratio drops to 11. In the end, and with all things considered, I'm convinced that's just too cheap to pass up.

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Stocks Mentioned

Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$124.75 (1.65%) $2.02
Zynga Inc. Stock Quote
Zynga Inc.
ZNGA
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$262.85 (1.26%) $3.27
Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
TTWO
$127.04 (1.75%) $2.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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