Buy, Sell, or Hold: Activision
Many analysts (Fools included) see big growth opportunities ahead for video game publisher Activision Blizzard (NAS: ATVI) . In addition to a recent 9% dividend increase, the company has been innovating to try to create long-term value for investors, but is it working?
Finding new ways to generate recurring revenue in an industry traditionally dependent on initial sales is Activision's specialty -- first with World of Warcraft and then with Call of Duty: Elite (both of which I'll return to later in this article).
Activision's newest recurring-revenue franchise is Skylanders. The innovative children's game is one of the first successful attempts at marrying physical toys (small figurines) with a video game. Since October 2011, when they were first released, Skylanders figurines and game copies have sold just under $200 million in the U.S., which is 4.2% of the company's 2011 total sales. A sales associate at my local Best Buy tells me these things have been sold out all year (and he was pretty shocked I didn't already know this). With new characters periodically released and a new video game slated for this fall, it definitely seems like a franchise that can be refreshed to maintain staying power.
Another new game, Diablo III, also has potential to provide Activision with yet more recurring revenue. The highly anticipated role-playing game will feature an in-game auction house, which will allow players to list game items in a marketplace for a flat fee. The auction will use real money by connecting to users' PayPal accounts. If this catches on with the millions of players this game already has lined up, it could generate major cash for both Activision and its stockholders.
World of Warcraft may still have been the No. 1 game in its class for 2011, but subscriptions were down nearly 10% from 2010. If that trend continues in spite of an upgrade for the game coming out later this year, then Activision would need to lean heavily on its other franchises to pick up the slack. That would be a lot of slack to pick up, though, with millions of users paying $15 a month, and none of their other franchises providing such steady or reliable sources of revenue just yet.
The video game industry in general is also hurting. According to the NPD Group, U.S. retail sales of video games -- including hardware, software, and accessories -- have fallen 25% from March 2011. When you put that up against the meteoric rise of mobile gaming, which is expected to double by 2016, then it's easy to see arguments for putting your money in a company like Zynga (NAS: ZNGA) instead . They might seem like different beasts right now, but that's what everybody used to say about Best Buy and Amazon.com, too.
Activision hasn't completely given up in the race against mobile, though. Skylanders recently launched on the iPad and other mobile devices. If the mobile version of the game works as well as the console versions, then parents on the go may deem this the perfect backseat partner. If not, then Activision will need to come up with another way to keep the game fresh and relevant for a finicky children's market.
On the adult side, Call of Duty: Elite was a great idea, but whether or not it will stand the test of time remains to be seen. While giving an avid fan base a place to keep track of their overall playing statistics for the game and create clans with their friends seemed like a no-brainer home run, it hasn't really taken off.
While 7 million members may seem impressive up front, investors should keep in mind that it was launched with Modern Warfare 3, which sold 6.5 million copies on the first day alone, and went on to become the best-selling game of the year. This means that 7 million is likely just a drop in the bucket of worldwide players.
It's also questionable that Activision doesn't quote the number as "active" members. Many gamers only signed up for the free maps, and haven't found the service useful or interesting beyond that. Renewal rates correlate with engagement, so if Activision wants to keep them coming back for more, it'll have to figure out a way to reel these players back in, and an (unconfirmed) Call of Duty: Black Ops 2 this fall may not be enough.
Losing their footing in the popular first-person-shooter category would leave room for competitor Electronic Arts (NAS: EA) to swoop in and pick up the discontented players with its Battlefield franchise.
While the cons are definitely relevant red flags worth watching, I agree with other analysts who think Activision is a great pick right now. The company has successfully built a number of strong franchises that seem to be as timeless as technology will allow, while still showing innovation and broadening its horizons. A few months ago I gave Activision a thumbs-up CAPScall, and I stand by that today. Click below to make your own call and add any of the stocks above to your watchlist:
At the time this article was published Fool contributor Amanda Buchanan owns shares of Activision Blizzard, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Fool owns shares of Amazon.com, Activision Blizzard, and Best Buy, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Amazon.com. Motley Fool newsletter services have also recommended creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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