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Activision Blizzard (NASDAQ:ATVI) beat the industry trend and its own estimates for the fourth quarter of 2012 as revenues earned during the three months ending December were up 25% from the 2011 levels. Operating income breached $1 billion for the first time in a quarter as digital revenues, which have higher margins than physical sales, grew by 22%. By contrast, video game sales for the entire industry plunged 22% during the holiday period. The "Call of Duty" and "Skylanders" franchises maintained high sales and were the primary drivers for revenue growth through the quarter. "Diablo III" also helped annual results selling more than 12 million copies worldwide through the year.

We believe that Activision can maintain its momentum through the next few years and is in a good position to capitalize on the launch of the highly anticipated next-generation consoles: Microsoft's (NASDAQ:MSFT) X-Box 720 and Sony's (NYSE:SNE) Playstation 4. Our price estimate for Activision's stock is $14, implying a premium of 25% to the current market price.

"Skylanders" Lifts Off

"Skylanders" appears to be the new cash cow for Activision, generating revenues in excess of $1 billion since its launch in 2011. At the end of the third quarter, Activision reported that the franchise had generated life-to-date revenues of $500 million, from which we can estimate that sales in the fourth quarter generated another $500 million. The franchise not only generates income through unit sales, but also requires gamers to purchase physical models of the franchise's characters that have to be placed on the "The Portal of Power" for the user to access the character. Toy sales have generated revenues of $100 million.

Activision has announced that the third game in the franchise will be launched during the holiday season in 2013. However, the franchise will face stiff competition from Disney's (NYSE:DIS) "Infinity" video game, which is being developed along similar lines and will also incorporate the company's popular characters from franchises like the "Incredibles," "Monsters Inc.," and "Pirates of the Caribbean." We will keep a close eye on these developments in the coming months.

Duty Calls

"Call of Duty: Black Ops II" met the standards set by its predecessors, achieving the top spot in the U.S. and Europe in terms of video game sales. Activision has observed a high degree of success by releasing annual editions of its "Call of Duty" franchise, and we expect this success to continue in the coming years. The established franchise will provide a platform for Activision to transition to the next-generation consoles expected to be released soon.

Nintendo

The slower-than-expected adoption of the Nintendo Wii U has not had much of an impact on Activision as the company generates less than 10% of its revenues from Nintendo consoles. We expect the console to pick up in the next few years, with Activision riding the trend.

Upcoming Titles

Apart from "Skylanders," Activision is also expected to launch " StarCraft II: Heart of the Swarm" in March and is looking to expand its popular "Call of Duty" online services to China.

Disclosure: No positions.

Source: 'Call Of Duty' And 'Skylanders' Help Activision Conquer The Video Game Industry