Ivan Kapulica's  Instablog

Warren Buffett”

Today I will talk about a great company which I feel is underestimated by analysts. I believe that you are all aware of Activision Blizzard. If not here’s a short summary:

“Activision Blizzard (NASDAQ:ATVI) is one of the world’s largest video game publishers and distributors. Along with primary competitor Electronic Arts, ATVI develops software for the PC and console markets. The company is home to the popular games: Guitar Hero, DJ Hero, Call of Duty, World of Warcraft, and Starcraft. The company reported net revenue of $4.3 billion and net income of $113 million in 2009” 

What is so great about ATVI in my opinion is that they are able to top earnings estimates despite a weak video game industry at the moment. And this year and the upcoming 1Q of 2011 has many reasons to also be great. Why? Look at the sales of their “new” game Call of Duty: Black Ops the game itself generated 650$ million in sales in just 5 days!! Yes, that’s 5 days. Some analysts are wondering how much fuel has left in the COD (Call of Duty) franchise? By the looks of it, the market and the gamers are still loving it, so who knows? What makes things even better is the close release date of Diablo 3 which I believe as a gamer will be superb, they released Star Craft2 which is also great. But the most exciting upcoming release to me is the World of Warcraft expansion “Cataclysm”. World of Warcraft has 11.5 million active users that are “forced” to pay a fee every month just so they can login to the virtual world of Warcraft. That makes me happy as a potential shareholder and as far as I can tell WoW players aren’t so unhappy due the monthly fee (they call it prepaid). So you have 11.5 million active players that have to buy prepaid’s and 2 months of prepaid costs 23$ that is 138$ for one gamer in one year.

The math here is easy 11.5millionx138$=1.587 billion approximately in revenue. It is great that every year there is a new expansion that you are also “forced” to have. The expansion “Cataclysm” will be 39.99$ on Amazon.com, let’s get back to the easy math :) 11.5 million times 39.99$ is aprox. 450 million bucks, how great is that? Hence, ATVI generates from World of Warcraft about 2 billion $ a year alone. By now this is a great company with a strong moat and a experienced management. Robert Kotick CEO and Brian Kelly Co-Chariman of the Board are 20 years by now in the business so it is a understatement if I say that they can be trusted. What makes me especially happy is that online gaming has become a mainstream form of entertainment and ATVI is leading in the online entertainment. Think about one more thing how many characters do they have, stories, games etc. What if they decide to sell all that for a movie or plural? Just like Marvel did? That could be a great future revenue booster! 

If you look at the current P/E it’s rather high. But the forward P/E should be somewhere around 15 which is great comparing to the industry in matter of fact comparing it to any industry not just gaming. Further, they have 2.2 billion $ in cash and another 1.1 billion in investments. A great Gross Margin of 50%, Net Profit Margin of 8% and Operating Margin on 9,5%. Over the year ATVI increased in price just 0,09% because the bad situation in the gaming industry and the underestimates from analysts. Also, they have no or little debt which is more than great! 

Conclusion: It surely isn’t a Graham buy (cigar butt) but it’s a wonderful company at a fair price with great story and good outlook for the future. If you ask me it has strong moat and people that can and will do everything to sustain it. 

A quickie on the economy. Ever heard of something called Presidential Cycle Effects on Real Economy? This tells us that the third year is usually the best year for the Stock Market. Since 1932 to this date every third year of Presidential Cycle had better average return than the other 3 years. Except 1939 because Hitler was in Poland and WW2 was raging in Europe. Also, don’ forget that we have the widely debated QE2 (quantitative easing part 2) which will almost surely make stock even more expensive.

Thank you for reading.

Stay tuned for more news and analysis.

***new edit - On February 10, 2010, the Board of Directors authorized $1 billion dollar in share buyback program! Thumbs UP!