Activision: A Sure Winner in the Game Console War

My first video gaming experience was on the Atari 2600 in the early 1980’s. Now, video gaming technology continues to dominate the toy market every year. For Christmas 2006, it’s the fight for the best seventh generation console. We have:

• Nintendo’s (NTDOY.PK) Wii, an interactive console that looks like a remote and works as a bat for baseball games and a golf club for golf games.
• Against the third generation Sony (SNE) Playstation, the PS3, which includes Blu-Ray and Wi-Fi technology.
• Against Microsoft’s (MSFT) Xbox 360, which has online service.

With all these choices, what company can you bank on as a good holiday investment? Sony stock price continues to fall and Microsoft is too big of a company to buy shares based upon its game console success. Nintendo is nothing but a pink sheet offering.

According to recent reports by the NPD research group, U.S. retail sales in August for video games jumped 17.5%. This is the third consecutive month of year-over-year growth for video game manufacturers.

Activision, Inc. (ATVI), one of the leading game manufacturers, saw sales jump 23% in August. The company produced revenue of $1.4059 billion in 2005 alone.

Activision is the sure winner in the console wars this Christmas. The company makes software games for every console that Sony, Microsoft and Nintendo can turn out. The company also releases its games for use on PC computers, and it owns some of the most popular game franchises around.

Even if gamers won’t shell out $600 for the new Sony PS3, they will buy more games for their current systems. And parents will buy games for their children.

Activision's games include action, adventure, action sports, racing, role-playing, simulation and strategy. Versions of its games are available for older versions of Sony, Nintendo and Microsoft consoles.

In essence, it doesn’t matter which system wins out at Christmas this season. Activision makes games for every single one.

Over the past five years, Activision has split its stock five times:

3-for-2 on November 6, 2001
3-for-2 on June 6, 2003
3-for-2 on February 23, 2004
4-for-3 on March 7, 2005
4-for-3 on October 10, 2005

Taking the stock split time pattern into consideration, the company may be due for another one fairly soon.

As of June 30, 2006, ATVI has 278.33 million weighted-average outstanding shares. Over the past five years, Activision stock has returned a 159.50% gain for investors.

Recent 52-week lows in late June and early July provided a perfect opportunity for investors to “buy on dips” before Christmas season. Since those lows, the stock value has increased by 28.53%.

Morningstar analyst Norman Young has pegged ATVI’s fair value at $18.00 per share. A buy at current levels would bank us a 24% gain as it moves towards fair value. He pegged $22.60 as a good high price target, which could give us a gain of 55.86%.

Activision’s sales in 1996 came in at $61 million. In 2005, Activision made sales of $1.48 billion, an increase of 2,326% in only nine years.

What I like the most about this company is that they have up to $792.58 million in cash and no debt to call their own. That’s substantial.

Their profit margin is low at 1.96%, better than being on the negative end of the scale. Its gross margin comes in at 37.63%, better than most of its competitors in the multimedia and graphics software industry.

According to annual data, Activision’s yearly revenue continues to increase substantially. In 2005, the company posted yearly revenue of $1.405 billion, up 48.35% from the 2004 fiscal year. ATVI posted total revenue of $1.468 billion at the end of the 2006 fiscal year, up 4.42% the year before.

Quarterly data is always skewed for companies like these that depend primarily on Christmas sales. Its third-quarter revenue for October through December of 2005 came in at $816.24 million, substantially more than the $598.73 million it made through the rest of the year.

Analysts expect the company to make –$0.12 per share, but $0.28 next quarter (for Christmas) and $0.15 leading into March 2007. Average revenue estimates for the current quarter ending this month is $134.60 million, and $1.08 billion for the year ending March 2007.

By the end of the fall/winter season of 2006/2007, Activision will have released Call of Duty 3, Marvel Ultimate Alliance, and Tony Hawk’s Project 8 on Sony, Nintendo, and Microsoft software formats. It’s also releasing a few other games on limited formats.

On a technical basis, ATVI’s daily chart shows support at all moving averages, including an MACD crossover similar to that from July through November 2005, which pushed the stock up 34.88% in value. The chart has just recently undergone a slight correctional period for 2006. It’s move back toward the 200-day Moving Average shows that investors anticipate astrong turnout for its upcoming earnings profits.

Although Activision predicts “weaker than expected market conditions,” what with the Sony and Nintendo battle come the holidays, ATVI’s price chart looks strong for a continued move up in price. Overall market expectations that consumer spending will drop this Christmas allows us to be cautious when investing in a cyclical holiday stock. But I think we’ll be pleasantly surprised by this company’s sales come early 2007, as well as the American consumer’s resolve to buy high-priced technology come the holidays.

Activision’s low price is very attractive to investors looking for Christmas stocks to add to their portfolio. Since this company makes games for all available, popular video game platforms, it’s a true winner this Christmas season in the “console wars.”