On the surface, the news just keeps on getting worse for ATVI – or does it?
First, GameStop (GME) posts disappointing results surrounding their holiday sales. To be fair, there is a VERY interesting take on GameStop over at SeekingAlpha.com regarding how the main metric that guided the “disappointing” holiday numbers, specifically, year over year same store sales, is not the metric to be using for a company like GME. This analysis is one that I find particularly interesting because it cuts against the grain and makes sense logically, but the market is obviously still punishing GME for lagging their year over year figures.
Now, however, Activision’s main rival, Electronic Arts (ERTS) is revising down their Q4 earnings due to the same weak holiday sales. My initial reaction is the same as what was written on SeekingAlpha this morning:
Electronic Arts simply “did not have the products that people wanted” and should be acknowledging that rather than “blaming everything on the environment.”
ATVI closed last night (1/11) at $10.89. It is looking like it dropped as low as $10.69 in pre-market. The thing to remember is that ATVI is not particularly affected by this news. I’m not going to say that poor numbers from GME and ERTS reflect well on ATVI’s strength in Q4, but the numbers don’t lie regarding the hit title Modern Warfare 2. This game has been the lone bright spot in a holiday season with no new consoles and very few impressive titles. Additionally, critics are raving about the new downloadable content (DLC) for the Guitar Hero series. Keep in mind that DLC is extremely high margin for ATVI and GME sees none of that revenue.
If you have conviction about the idea as I do, I think now represents a fantastic buying opportunity. The sector malaise is likely going to lead to selling pressure on ATVI, which allows the focused investor to pick up the name at a big discount. The basis for the ATVI recommendation is still intact: Modern Warfare 2 is breaking records, and the Call of Duty franchise will continue to be a cash cow. World of Warcraft is finding new ways to monetize the name (including a movie coming out in 2011). Starcraft II is still going to be a phenomenon of a release that will be coupled with the release of the new, improved battle.net which will offer premium service to its users.
ERTS and ATVI may look similar to some investors, but we know better.