Why I Added to My Activision Position

Oct. 4.10 | About: Activision Blizzard, (ATVI)

by Chris Katje

It seems these days that the video game sector is crowded with numerous companies. Each company has hit games series and seems to have a roller coaster in earnings based on game releases. Several companies are buying into social gaming. Other companies, like Activision (NASDAQ:ATVI), are relying on recurring revenue from users’ monthly subscription fees. Currently eleven million users pay ten to fifteen dollars a month to play World of Warcraft, and Activision Blizzard owned property.

In the current quarter Activision is releasing the newest Guitar Hero game and Spider Man Shattered Dimensions. While neither of these games will break sales records, they are both still valuable parts of the Activision franchise that can put out new games from the same series every year or two. The quarter after will have a new Tony Hawk videogame, which will feature skateboarding and snowboarding, a brand new James Bond game exclusively for the Nintendo (OTCPK:NTDOY) Wii, a Bakugan game, and a Bloodstone game. This all important fourth quarter will also show the newest Call of Duty game and the expansion pack Cataclysm for World of Warcraft. Next year will have two more expansion packs for the recently released PC game Starcraft 2 and the much anticipated release of Diablo 3.
I have owned Activision shares for over eight months and recently doubled my position. I believe with the fourth quarter releases of Call of Duty Black Ops and Cataclysm for World of Warcraft, the company should blow out fourth quarter earnings estimates. The pre-buys remain strong for Activision games. On September 22nd Amazon listed the following titles in the top 100 of the video games category:
  • Call of Duty Black Ops [XBOX] #7
  • World of Warcraft Cataclysm Collector’s Edition [PC] #9
  • Starcraft 2 [PC] #10
  • Wipeout [Wii] #12
  • Call of Duty Black Ops [PS3] #21
  • Call of Duty Black Ops Hardend Edition [XBOX] #39
  • World of Warcraft Cataclysm [PC] #43
  • Call of Duty Modern Warfare 2 [XBOX] #52
  • Call of Duty Modern Warfare 2 [PS3] #62
  • Spider Man Shattered Dimensions [PS3] #81
  • Starcraft Battlechest [PC] #89
Six of these eleven titles have not been released and represent the popularity of pre-ordering video games. Also, on Amazon the video game category includes video games and hardware, which means some of the top spots are taken by the systems themselves and the new motion sensitive hardware.
The future burns bright for this company as it has many new developments and possibilities ahead. The annual Blizzcon convention is in October and may come with news of the newest MMORPG game from Blizzard. Recently Activision signed a deal with the Bungie team, developers of the Halo game. This deal does not give Activision the rights to Halo but gives them the creative forces behind one of the best selling video game franchises of all time. In China, Netease (NASDAQ:NTES) has received written approval for the Wrath of the Lich King, which should in return gain new subscribers to World of Warcraft in this most populous country. Starcraft 2 is currently in open beta testing in Taiwan and Korea, with 10,000 people sampling the game before they buy it.
One of the biggest growth items for the future is the continuing development of battle.net, which is a property of Activision Blizzard. Currently the home of the World of Warcraft, Starcraft, and Diablo, the site was recently overhauled to create a more user friendly experience. The company is trying to make it user friendly by offering one monthly fee to play all the games on the site. Someday hopefully Activision can get Call of Duty on to this site, which would provide additional monthly revenue from the bestselling game of all time. The CEO of Activision, Bobby Kotick, has already publicly said he is not happy with Microsoft’s (NASDAQ:MSFT) XBOX live platform because it capitalizes on the success of Call of Duty and gains extra revenue from users. I think someday you will see a way to get Call of Duty on the battle.net platform. The possibility of a MMORPG Call of Duty or Starcraft game exists as well. The company can also come out with games to take advantage of the new camera and motion sensor controllers from both Sony (NYSE:SNE) and Microsoft.
The stock currently sits around $11 a share. Each share has about $2.32 in cash built in. If you subtract the cash from each share, then based on analysts estimated .74 in earnings this year the multiple is 11.7 for 2010. The forward estimate for 2011 is dropped to 10.6 and looks even more affordable. The stock yields 1.4% at its current price. The company recently paid its first dividend and could always give some cash back to shareholders this way with increasing dividends. The company could always buy a smaller gaming company like Take Two (NASDAQ:TTWO). The CEO owns 3 million shares of Activision stock.
I expect the stock to slowly climb up and probably have small spikes around Blizzcon in October, and the first week of November with the release of Call of Duty Black Ops. The stock could go as high as $18 in this time frame. I would look to buy around $10.50-$11.00 and would sell at $18.

Disclosure: Long ATVI