Activision: A Bright Light in the Dark Consumer World?

I am long a specialty retail play. I had to slap myself out of the stupor for owning one in an environment I have dubbed as a consumer recession. What am I long - how about some Activision Blizzard (ATVI)? I was fortunate/unfortunate enough (we'll know later) to be filled on some of my orders in the $10.00 region and I had a few more orders down in the $9.00 that were not filled.

So, why am I long a retail name, much less a specialty retail name?

First and foremost, it is mainly as a hedge to some of my other retail shorts. So, let's make that abundantly clear. I am bearish on the consumer and the economy. But, such bearishness must be given protection to any rampant rallies that might occur and I've selected ATVI, as it is currently dominating competitors such as Electronic Arts (ERTS) and THQ (THQI).

Secondly, I would propose that video games are by no means recession resistant, but they are less affected by a recession than other types of specialty retail. Why? Gamers are hardcore. Many are addicts. A game costs a measly $40-$60 and gives you hours upon hours of entertainment. And, ATVI has some of the best titles out there right now, including the Guitar Hero franchise, Call of Duty (fourth installment is due out for the holidays), World of Warcraft (new expansion pack out for the holidays), among many others. The company offers relatively cheap products and this benefits it in an environment where the consumer is struggling. When that new game hits, most people must have it, especially if it’s an installment in an already proven franchise such as the games mentioned above.

Thirdly, in addition to the strong products set to hit for the holiday season, ATVI has some very highly anticipated games in the pipeline for the future as well. If anyone is a fan of Blizzard's games (now a part of Activision Blizzard), then you already know what I'm talking about: Diablo 3 and Starcraft 2. These are highly proven franchises and are long awaited sequels (especially Starcraft 2). The entire nation of Korea will probably pick up a copy of SC2, I'm not even kidding. The game's prequel, Starcraft, was that big of a hit over there. So, future revenue streams are well in place.

Fourthly, even in a weak consumer environment, ATVI was still able to deliver solid earnings and stick to their forecast. And, the company even announced plans to buy-back $1 billion of stock. After all, it has $3 billion in cash. Here are some takeaways from the earnings call:

For the September quarter, Activision Blizzard had two of the top-10 titles in dollars on all console platforms in the U.S., according to The NPD Group. For the September quarter, Activision Blizzard had two of the top-five PC titles worldwide -- Blizzard Entertainment's World of Warcraft: Battle Chest (R) and Call of Duty 4: Modern Warfare, according to Charttrack, Gfk and The NPD Group.

And, some data from the recent quarter courtesy of Barron's Tech Trader Daily:

For the quarter, the video game company posted non-GAAP revenue of $770 million, well ahead of the company’s previous forecast of $620 million. ATVI posted non-GAAP EPS of 7 cents a share, better than the company’s forecast of 4 cents. For Q4, the company sees non-GAAP revenue of $2.2 billion, with profits of 29 cents a share.

Therefore, as you can see, so far, the company is holding up just fine in this environment. Yes, the consumer should theoretically weaken as we move forward, but ATVI has solid titles; is selling cheaper items; and is selling to a consumer who, despite the recession is unlikely to give up its products. If you want any evidence that ATVI has a comparative advantage in titles, then simply compare ATVI's most recent quarter to rival THQ's quarter. Yea, that wasn't pretty.

Lastly, I want to highlight that $10 billion hedge fund Caxton Associates run by Bruce Kovner was out adding ATVI as a new position in its portfolio last quarter. It didn’t just 'add it,' it really loaded up, and brought it up all the way to its third largest portfolio holding. I wrote about Caxton's purchase earlier, where I detailed its portfolio holdings. Caxton is one of the many hedge funds I track on Marketfolly.com.

ATVI is best of breed in the gaming space and I am happy to be long the name as a hedge to my other specialty retail shorts. (See my post on the deteriorating consumer environment for short ideas). But, more importantly, the company definitely has a bright near-term future with all the anxiously awaited titles it has lined up.

I would be remiss if I did not end this piece with a 'proceed with caution' label. Specialty retail is easily going to be the hardest hit in the retail space. This is simply going to be a case of "who loses the least." If you do not want to take on the risk involved with this name, I would highly suggest checking out cheap retail plays on the "trading down" of the consumer to cheaper alternatives. These names include the masters of the cheap domain: Wal-Mart (WMT) and McDonalds (MCD). You can read my thoughts about MCD's dominance here. Apart from those, playing retail names from the long side will be an uphill battle.

Disclosure: Long ATVI.

Comments

[nichcom:]

Totally agree. You forget to mention the fact that Activision has one of the biggest subscription base for online games in the industry (WoW) that now totals 11 mln. Charge each player just $1 and you get revenues up $11 mln. Not that bad after all.

2008 Nov 11 10:57 AM

[Market Folly:]

very true, a recurring revenue stream is a bonus. thought i had included that in my mention of WoW but apparently not. thanks

2008 Nov 11 12:56 PM