Is Activision Too Inactive?

With shares of Activision Blizzard (NASDAQ:ATVI) trading at around $14.90, 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

For the week ending April 20, Activision had several top-selling games in the TOP 75 (global), but its top spot was #9 with Call of Duty: Black Ops II (X360). Its second spot was at #16 with Call of Duty: Black Ops II (PS3). The next spot claimed by Activision was #28 with Starcraft II: Heart of the Swarm (personal computer). At #58 was Starcraft II: Wings of Liberty (personal computer). Skylanders: Spyro’s Adventure and Skylanders Giants also made the list. Overall, that’s a decent performance, but Nintendo claimed three of the Top 10 spots with Tomodachi Collection: Shin Seikatsu, Luigi’s Mansion: Dark Moon, and Fire Emblem: Awakening.

Take-Two Interactive (NASDAQ:TTWO) is holding its own with Bioshock Infinite, NBA 2K13, Major League Baseball 2K13, and Grand Theft Auto IV. Electronic Arts (NASDAQ:EA) is also still making its presence felt with FIFA Soccer 13, Sim City, Madden NFL 13, Battlefield 3, Crysis 3, and Tiger Woods PGA Tour 14.

What stands out most about the information above is: where are all the new and exciting games? Of course, there is a lot being done in regards to game development, but the industry needs something new and fresh – a different angle that will excite gamers once again. Which company is capable of producing such a title?

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Looking at Activision in a big-picture sense (opposed to specific gaming titles), there are many positives, which include:

  • Consistent profits
  • Free cash flow improvement
  • Consistent annual revenue growth (despite industry concerns)
  • Analysts love the stock: 23 Buy, 2 Hold, 0 Sell
  • A 3.1 of 5 rating on Glassdoor.com (indicates strong company culture)
  • Quality debt management
  • Strong margins
  • 1.30 percent dividend yield (peers don’t offer any yield)

There aren’t enough negatives to form a list. One potential negative is that the stock didn’t hold up well in 2008. However, not many stocks did, and Activision held up better than its peers at that time.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Activision, Electronic Arts, and Take-Two. Activision has a market cap of $16.61 billion, EA has a market cap of $5.37 billion, and Take-Two has a market cap of $1.34 billion.

ATVI

EA

TTWO

Trailing   P/E

14.67

32.69

N/A

Forward   P/E

14.39

16.11

6.90

Profit   Margin

23.66%

4.42%

-11.18%

ROE

10.54%

8.29%

-19.62%

Operating   Cash Flow

$1.34 Billion

 $378.00 Million

 $11.10 Million

Dividend   Yield

1.30%

N/A

N/A

Short   Position

N/A

5.60%

19.30%

 

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

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for Activision is stronger than the industry average of 0.30. Debt management has been superb.

Debt-To-Equity

Cash

Long-Term Debt

ATVI

0.00

$4.38 Billion

$0

EA

0.28

$1.49 Billion

$554.00 Million

TTWO

0.58

$448.72 Million

$330.31 Million

 

T = Technicals Are Strong     

Activision has been a steady performer over the past three years.

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1 Month

Year-To-Date

1 Year

3 Year

ATVI

2.35%

41.38%

17.03%

35.16%

EA

0.51%

23.14%

16.71%

-9.56%

TTWO

-2.86%

41.69%

9.09%

44.44%

 

At $14.90, Activision is trading above all its averages.

50-Day   SMA

14.50

100-Day   SMA

12.97

200-Day   SMA

12.26

 

E = Earnings Have Been Steady                   

Earnings and revenue have consistently improved on an annual basis. This is somewhat rare, and it’s certainly a positive.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

N/A

3.03

4.45

4.76

4.86

Diluted   EPS ($)

N/A

0.09

0.33

0.92

1.01

 

 

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

1.41

1.17

1.08

841.00M

1.77

Diluted   EPS ($)

0.09

0.33

0.16

0.20

0.32

 

Now 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

Changes take place in the industry at a rapid pace. Companies involved must be willing and capable of making necessary adjustments. Creating excitement with a new technological angle or game title is a key to success. It’s also imperative that digital is a part of the game plan. The biggest potential negative is consumer weakness, which has been a concern for quite some time now.

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Conclusion

Activision is a very well-run company that’s still trading at a fair valuation. There will be setbacks, especially during bear markets, but over the long haul, Activision is a winner. It’s also possible that Activision will make an important acquisition at some point in the future. This would increase market share, and Activision has the cash to do it. However, it’s not a necessary move.

Activision is a long-term OUTPERFORM.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.