- The gaming industry's growth story isn't for the console makers but the video game makers
- Activision is better than EA and Take-Two when it comes to valuation and dividend
- Now that it's an independent company, ATVI will be even more shareholder friendly
It took the major console makers, Microsoft (MSFt) and Sony (SNE), over seven years to bring a new console to market. And one of the key benefactors of the next generation console launch should have some benefits for one of the top game makers, Activision-Blizzard (ATVI). What's more is that game publishers like Activision have growth opportunities not only on new consoles, but also other platforms such as mobile and social.
As far as the new gaming consoles go, they appear to have been a holiday success. As of the end of 2013, Microsoft sold over three million Xbox One consoles, and Sony sold over four million PlayStation 4 consoles. The NPD Group notes that consumers shelled out some $3.3 billion on physical games and hardware during December, which was up 2% year over year. Looking back to November, when the new consoles launched, hardware sales were up 28% year over year to $1.37 billion.
The rise of downloadable content and full game downloads should also be incremental to the industry. Although the shift to digital content will be a major headwind for major console and physical game retailer GameStop (GME), the move will still be a positive for the likes of Activision and Electronic Arts, opening up more sales avenues for the game makers. There's also rumors that Microsoft might be looking to launch a cheaper Xbox One without a disc drive.
How Activision succeeds
Activision's core franchise brands include Skylanders, World of Warcraft and Call of Duty. The company is also launching a new game called Destiny from Bungie. 2014 will also include new games, such as Call of Duty: China, Hearthstone: Heroes of Warcraft, Destiny, new Skylanders, and Diablo III expansion pack. Worth noting is that Activision's latest Call of Duty game was the top selling stock-keeping unit for December, according to The NPD Group. In addition, during the latest quarter, World of Warcraft subs managed to rise by 200,000 to 7.8 million, the first increase in a number of quarters.
However, the biggest news of late for Activision is that it bought up 429 million shares from Vivendi (OTCPK:VIVHY). The move will be accretive to 2014 EPS. Activision is now an independent company and can decide for itself what to do with excess cash. Activision is likely to become a more shareholder friendly company since the Vivendi deal.
The rest of the video game industry
Electronic Arts is known for its Madden NFL, FIFA and Battlefield franchises. And while it has a number of top selling games, it still appears to have a number of internal problems. In 2013, and for the second year in a row, EA was voted as the Worst Company In America by Consumerist. Take-Two Interactive (TTWO) is the other major video game maker. Take-Two has the popular Grand Theft Auto brand. However, unlike EA's Madden and FIFA games, which come out yearly, new installments of Grand Theft Auto have been coming out every five years or so.
Looking at things from an investment standpoint, Activision is the cheapest among the three major game makers. Activision trades at only 13.6 times forward earnings, while EA and Take-Two trade just above 17 times.
Activision has the strongest operating margin over the trailing twelve months at 33%, while EA's is 6% and Take-Two's is a negative 2.8%. What's more is that Activision is the only one of the three paying a dividend. Its dividend yield is at 1.1%. As well, its dividend payout is only 18%; suggesting Activision has room to up its dividend payment.
Investors get the cheapest stock and a dividend with Activision. Meanwhile, it also has the opportunity to become a more shareholder friendly company now that it doesn't have the Vivendi overhang Meaning, the company could up its dividend payment and increase share buybacks.