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  • Activision Blizzard (ATVI): Game On! 0 comments
    Jul 30, 2010 10:21 PM | about stocks: ATVI, NTDOY, MSFT
    Activision Blizzard: Game On!

    In an industry that has come under fire lately, one company has continued to shine.

    Activision Blizzard (NASDAQ:ATVI), now the world’s largest maker of video game, remains as committed to innovation and excellence as ever, and continues to stay strong in these tough times.

    1) THE BUSINESS

    Activision Blizzard is an undisputed leader of the video game industry. As their industry undergoes a significant transformation, they have managed to avoid the pitfalls that some of its major rivals have fallen into. For instance, Electronic Arts, hasn’t posted positive earnings in years and has lost 75% of its value since its 2008 highs. Activision Blizzard, has not only stood pat during this time, but has also managed to position itself as its industry’s leader for years to come. The “Activision” segment is the more traditional (yet still excellent) developer and publisher of console and computer games such as the enormously popular Tony Hawk, Call of Duty, and Guitar Hero franchises. This segment of the businessis known for its volatility, which should be expected from the traditional video game industry: when a popular, well marketed new video game is released, money can come flooding into the company, but it can then experience periods of relatively little cash coming in. However, in what I see as an ingenious merger, Activision joined forces with Blizzard Entertainment.

    Unlike it’s console-based peers, Blizzard specializes in the new online gamingspace that is revolutionizing the industry. These are games like the massively successful World of Warcraft franchise. Developers are able to continually improve and expand the product even after the game is released through online updates and expansion packs. But that’s not even the best part (at least not for investors). With these kinds of games, the developer can collect regular subscription fees along with the one-time price of the video game, giving Activision Blizzard to have the best of both worlds: the big hits such as Modern Warfare 2 that rake in millions in just a few weeks, along with the ultra-consistent cash flows from its online subscriber base. In fact, just from WOW alone, Activision Blizzard brings in a cool $75 million every month! No accounting tricks. Just cold, hard cash. And with the long awaited releases of Cataclysm, am expansion pack to World of Warcraft, and Starcraft II, you can be confident that the money will continue flowing in. Throw in a nice 2.5% dividend (unheard of in the gaming industry), and you’ve got one heck of a business.

    2) THE MANAGEMENT

    The president and CEO of Activision Blizzard, Robert Kotick (“Bobby”) has been in his position for almost twenty years now, and shows no signs of leaving anytime soon. His strategic acquisition of Blizzard Entertainment demonstrates his vision of the gaming industry and his drive to occupy its peak. His CFO/COO, Thomas Tippl, recently described his boss in an interview: “Bobby has incredibly vision, unbelievable energy. Activision Blizzard is his job, his hobby, and his sport.” Now THAT is what I like to hear about a Chief Executive.

    3) THE PRICE

    Don’t be fooled by the high P/E multiple of 48. Instead, you should looking at the company’s  Price/ Free Cash Flow, a more accurate measurement of a company’s value. The cash machine that is Activision Blizzard is currently only trading at about 11x free cash flow, a very good value for a company expected to grow at a rate of 14% over the next five years. Plus, an industry leader and cash flow machine like Activision Blizzard deserves to be trading at a PEG higher than 1.08!

    4) THE SAFETY NET

    Using very reasonable growth assumptions, I peg the fair value of Activision Blizzard somewhere around near $17 range (and that’s not even including the $2.63 cash per share they’ve got in the bank), but the stock is still hovering around $11, giving you a 35% margin of safety on your investment. Also don’t forget they pay a nice dividend as well so you get paid to wait for the market to wake up to the true value of this great business.

    5) THE EXECUTION

    We’re in Activision Blizzard for the long haul, so we don’t need to sweat too much about a few pennies on our entrance. Given the value of this company and the discount at which the market is offering it, I am a buyer of this stock right now.

    By Connor Haley with Sam Souryal

    Disclosure: At the time of writing, Connor Haley owned shares of Activision Blizzard (ATVI). Sam does not own any shares in the companies mentioned.

    Disclosure: Long ATVI


    Disclosure: LONG ATVI
    Stocks: ATVI, NTDOY, MSFT
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