Activision Blizzard, good business, what about the shareholders?

One of the great benefits of having access to the US market is the opportunity to invest in really exciting companies that you would not normally have access to. One such company, which falls in our list of recommended stocks, came out with second quarter results. I'm talking about Activision Blizzard. If you are unaware of what these guys do, here is the description from their website.


"Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide online, PC, console, handheld and mobile game publisher with leading market positions across every major category of the rapidly growing interactive entertainment software industry.


Activision Blizzard's portfolio includes best-selling video games such as Call of Duty as well as Spider-Man^T, X-Men^T, James Bond^T and TRANSFORMERS^T, leading franchises such as Spyro^T and Blizzard Entertainment's StarCraft, Diablo^R, and Warcraft franchises including the global #1 subscription-based massively multi-player online role-playing game, World of Warcraft." I'm pretty sure there are a couple of nerds roaming around those headquarters!

To gain a perspective of how big this industry is, when the company released Call of Duty: Modern Warfare 3, 6.5 million copies were sold in the first 24hrs. That pulled in revenue of $400 million in 24 hours for the biggest entertainment release of all time, bigger than any movie. The biggest movie release was The Avengers which grossed $200 million in the opening weekend. In fact total sales of Call of Duty have beaten both the Star Wars and Lord of the Rings film series.


So let's look at the numbers because a good company is not necessarily a good investment. Revenue for the quarter came in at $1.054bn with operating income of $300mn. This equated to 20c a share well above estimates. Analysts expect the company to make $1.07 for 2012 while it trades at $11.77. Surprisingly the company looks quite cheap with a forward PE 11.


Of course there is reason for the low valuation. Vivendi, a French based media company owns 61% of the company and have been looking to offload the stake. That is not a good sign and as Paul points out, it is like Barclays trying to offload its ABSA stake, there must be a reason why. There has also been a decrease in product sales as the financial crisis has put pressure on such discretional spending. The industry is also in a transition with big shifts to online gaming causing console based sales to fall to its lowest levels since 2007. Even though Activision's earnings beat expectations, they were down 45% from the last quarter.

So do we buy the stock after weighing the pros and cons? I still like it. It is volatile and relies heavily on blockbuster releases. Innovation for new and better games is paramount. And what about the shift to online gaming? They are of course embracing this and already have an agreement with Tencent in China to release Call of Duty online. That is very exciting. It looks like most of the bad news is already factored in. It is not for the faint hearted and can be volatile but if you are willing to ride the wave there is a good and exciting opportunity here.