Activision-Blizzard (ATVI) Part II

Market Sentiment

Video game sales have long been categorized as consumer discretionary spending. What this means is that it is a non-essential purchase. If a consumer faces declining salary, video games would be one of the first expenses to go. This makes a lot of sense. If you have a choice between eating or paying rent and purchasing an Xbox 360, I think the choice is clear. If the economic outlook is somewhat hazy, parents won’t be purchasing as many video game titles for their children as they would otherwise.

To be fair, the video game sector has not given investors much reason to think that this recession would buck the trend. Year over year sales for the month of November were down 7.6% after seeing October’s numbers fall 19%. The popular (but expensive) genre of Rhythm Music games (think Guitar Hero/Band Hero/DJ Hero) have all posted surprisingly large drop-offs relative to 2008, and the recession has to be a major reason for this. While these numbers should raise red flags about purchasing any companies in the video game sector, the video game sector is really following trend with the economy on the whole. In times of economic struggle, purchases with associated large fixed costs are going to go down in favor of more standard purchases. Companies won’t replace computers or do server overhauls. Consumers won’t buy a new video game console or buy games that require drums and guitars (and the high costs associated with this equipment).

Using this logic, it is easy to see why the last 6 months have seen ATVI lose 14.5% of its value while its largest competitor, ERTS, has lost 18.9%. Consumer spending is down. The recession may be “over,” but consumer spending isn’t back to pre-recession levels, and high unemployment continues to be a very real and scary anchor on economic growth.

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