I wrote this article for several reasons, and I wish to go over them briefly. First and foremost, I was coming across a lot of speculation about gamers as a consumer group in articles pertaining to Activision Blizzard (ATVI). Being both an avid gamer and passionate investor, I felt I might be able to lend a perspective on this stock not commonly given. Secondly, I found many of the existing articles on ATVI to be overly technical, (ignoring some beautiful fundamental things about the company) and narrowly focused (which could make it hard for one to "draw a complete picture" of the company from reading). Finally, after being such a vocal commentator on articles pertaining to the stock; I was asked to write an article on ATVI. The following is my perspective.
First, I would like to make note of Activision Blizzard's continued success in an otherwise down sector (and economy for that matter). As other companies struggle to keep the lights on (citing examples such as the THQ (THQI) bankruptcy, or the completely negative third quarter for Electronic Arts (EA)), Activision Blizzard has managed yet another incredibly profitable year. This isn't a massive shock, in that the company has had nothing but positive earnings surprises for the past several years, but I thought it worth mentioning before I began.
Like many other gaming companies, Activision Blizzard experienced a recent decline in the trading value of its stock. This decline was a response to a mixture of media focus on violent game content, and near term fiscal cliff uncertainty. Prior to these events, the stock was facing downward pricing pressure as majority stake holder Vivendi (VIVEF) expressed desires to sell off its controlling interest in the company. Rather than build a case for ATVI around the temporary nature of these circumstances, I would like to make a standing case for the company that is only made stronger by its current lower trading cost.
Activision Blizzard is a premier developer of electronic entertainment and games for multiple platforms and mobile devices. They possess a litany of popular titles, and their products span the full spectrum of gaming genres. Noteworthy franchises include Call of Duty and World of Warcraft; but lost on many are the tons of other titles being cranked out by the company (such as "Angry Birds Trilogy" for example). They maintain operations in multiple countries across Europe, and have recently (and lucratively) penetrated the Chinese gaming market with established contracts through NetEase.
Fundamentally, the company seems sturdy and well managed. I personally would need a team of Sherpa to navigate the mountain of cash they have on their balance sheet; and they carry it all with a nonexistent debt position. Subscriptions and microsales provide a massive free cash flow, and the occasional super hit games provide substantial wealth in their own right. Some would focus on declining subscription numbers for key games, but I feel that these numbers (especially at the company's current trading price) are fiercely overemphasized; and from experience playing the games focused upon, feel as though theories of a "subscription crash" anytime in the near future are simply ridiculous. Should anyone wish to ask more about this subject (or possibly challenge my assertions), I would be happy to lend my time discussing it.
In assessing the company, my greatest focus was in comparing operating costs for the company versus savings and existing revenue streams. This focus lead me to believe that if key franchises (such as World of Warcraft) were to become obsolete over time, that the company could safely transition by either investing in the generation of new franchises, or by outright purchasing IP from other developers. Especially in a depressed gaming market (like the one we are currently experiencing), ATVI's cash reserves could afford them a level of aggression that other companies couldn't match. This assumes a period of several years for obsolescence to occur, and frankly, I've seen nothing to imply that it would occur at an accelerated rate.
ATVI's greatest company asset (in my opinion) is the cult like devotion consumers show to the products they generate. I know folks earning $7.25 an hour that faithfully pay their World of Warcraft subscriptions and never miss an expansion pack release. Middle aged men and women stuffing shopping carts full of Skylander toys because it's all their children want this year. Complete adults, dressed up as dwarves and draenei at each year's Blizzard Convention (or "BlizzCon"). I can't tell you how many 12+ hour days I spent leveling my rogue in WoW; but what I can say is that even for my level of commitment to the game, I was constantly surrounded by ever more devoted zealots. These aren't your typical consumers, and you would be doing yourself a disservice to assume that they were.
In terms of trading value, I would say the company is heavily discounted (making purchases of $10.50 per share possible in late December, and trading as low as $11.00 per share in early January). As mentioned earlier, not only are they setting sales records in a depressed market (easily outstripping their peers), but they are doing so at a share price that makes them far cheaper than those same competitors. For ATVI's domination of the market, they are currently trading at roughly 1.1 times book value; and if they simply MEET earnings expectations for Q4 (They've exceeded expectations every quarter for several years now), they'll be trading at a P/E of about 9 (versus an industry average of 18.2). Cash per share represents a quarter of the company's current trading price, and GMI risk indicators are lower for ATVI than several industry peers. Throw in a dividend, and I can't see why this isn't the Volkswagen (VLKAY) of gaming companies.
Either way, those are my thoughts on the matter; and I would suggest that any reader of this article perform their own thorough research before making any investment decisions. Any given writer will carry with them a degree of bias, and the only interests you should be investing towards are your own. Thanks for reading, and good luck out there!
Disclosure: I am long ATVI.