Video game software is a tough business. Trends come and go and companies need to stay current with today's rapidly advancing technology. On the whole, almost all video game software companies have had a year in the red in the last five years, and forward earnings predictions are always taken with a grain of salt.
Activision Blizzard (ATVI) seems to have broken away from the pack and has done very well over the last couple of years. From reporting a $107 million loss in 2008, the company has boosted revenue 16.26 percent annually to report earnings of over $1 billion in 2011.
The company has been successful with several popular game titles including Guitar Hero, Call of Duty, Warcraft, and StarCraft. Analysts expect Activision Blizzard's earnings to grow with the market over the next few years, but many remain bullish on the stock. According to Yahoo! Finance, 10 analysts rate Activision Blizzard a "Strong Buy", 10 rate it a "Buy", and 5 rate it a "Hold".
The difficulty behind video game software is that companies have to continuously release new titles and series to stay afloat. Development costs a lot of time and money, and predicting sales is a difficult process for new series.
I believe that video game software companies will have a much easier time staying profitable during the next generation of systems as they will move to a direct download model and cut out another player in the value chain.
Activision Blizzard's next earnings announcement in May 9th. Analysts expect earnings per share of 4 cents on revenue of $552 million. With expected revenue of $4.57 billion for the company in all of 2012, this quarter is only a very small piece of the pie and a slight miss or slight surprise should not affect stock price very much. What may be difficult for the company is if they give a bad future guidance. The company is under a lot of pressure to produce more popular titles after their recent wave of successful games over the last three years.
Right now I believe that Activision Blizzard is a good buy. With its strong portfolio of titles, I believe it will continue to innovate and stay profitable. I currently value the stock at $15 and expect shares to outperform the market by 10 percent to 20 percent over the next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.