Is Activision Likely to Outperform?

With shares of Activision Blizzard (NASDAQ:ATVI) trading at around $13.54, is ATVI an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The largest video game maker in the United States recently reported Q4 EPS of $0.31, and Q4 revenue of $1.77 billion. Both were significant improvements over last year. These impressive results were attributed to “Skylanders,” “Call of Duty,” and overall strong holiday sales. “Call of Duty: Black Ops 2” was the first game ever to generate $1 billion in sales in 15 days. “Skylanders Giants” was the number one children’s title in Q4 in North America and Europe.

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It’s still possible that Activision will seek a buyer. It’s also possible that Activision will put some of its cash to use in the way of dividends, stock repurchases, and/or acquisitions. The only roadblock here is if Activision wants to hold on to that cash due to volatile market conditions.   

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio and balance sheet for Activision are perfect.   

Debt-To-Equity

Cash

Long-Term Debt

ATVI

0.00

$3.96 Billion

$0

EA

0.28

$1.49 Billion

$554.00 Million

TTWO

0.67

$328.28 Million

$325.54 Million

 

T = Technicals on the Stock Chart Are Strong

Activision hasn’t performed as well as many other stocks throughout the broader market over the past few years, but the industry had been hurting for a while. Currently, that trend might be reversing itself.

Activision has outperformed Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO) over the past year. Activision is the only company of the three that offers yield, which is currently 1.50 percent.

1 Month

Year-To-Date

1 Year

3 Year

ATVI

22.66%

26.93%

8.96%

38.50%

EA

25.71%

19.21%

-5.10%

-0.58%

TTWO

27.33%

36.24%

-6.89%

58.73%

 

At $13.54, Activision is trading above all its averages.  

50-Day SMA

12.36

100-Day SMA

11.74

200-Day SMA

11.15

 

E = Earnings Have Been Steady            

Earnings and revenue have improved every year over the past five years.  

2008

2009

2010

2011

2012

Revenue ($)in billions

3.03

4.28

4.45

4.76

4.86

Diluted EPS ($)

-0.11

0.09

0.33

0.92

1.01

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings.

12/2011

3/2011

6/2012

9/2012

12/2012

Revenue ($)in billions

1.41

1.17

1.08

841.00M

1.77

Diluted EPS ($)

0.08

0.33

0.16

0.20

0.31

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The industry had been hurting, but the top video game makers are beginning to focus more on updating its top sellers, which has led to stronger results. It’s going to be more about quality than quantity going forward. “Skylanders” is one example. The third installment was just announced.

Conclusion

From margins to growth to the balance sheet, everything about Activision looks great. Ironically, the biggest danger is better-than-expected net revenues, record operating margins, and record earnings. In other words, the news can’t get much better. It should also be noted that Activision stated that it expects 2013 to be strong, but not as strong as 2012. It looks like Activision is a good momentum trade right now, but there might be some hiccups ahead. If you look at the stock over the past few years, it’s the ultimate trading vehicle as it rarely breaks out of a close range.

Activision is a top-notch company with excellent cash flow, but if you’re an investor, then you likely already missed the best gains year-to-date. Therefore, Activision is a WAIT AND SEE.

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