Posts Tagged 'ATVI'

Modern Warfare 2 Tops $1 billion in Revenue (ATVI, ERTS)

Another day, another big news item for ATVI.  The sixth iteration of Call of Duty has brought in $1,000,000,000 in revenue since it was released in November.  Yes, this is a record for video game sales.  ATVI is trading higher on the news, as opposed to yesterday when it was trading lower on approximately the same news released from Electronic Arts’ perspective.

Yes, the video game sector on the whole is weak.  But to reiterate the points made in our initial Activision posts (I, II, III), ATVI is in a great position relative to its competitors because their franchises are ones that consumers want to buy.  ATVI’s underlying financial numbers look great, and they have a product line that consumers will purchase regardless of any changes in their discretionary income.  While discretionary spending may be down in the last 18 months or so, consumer demand for quality products remains high.  As such, we will continue to see trends like CoD:MW2’s success, or the success of Avatar.

Gamestop Revises Q4 Earnings Down (GME, ATVI)

Gamestop (GME) is one of the market’s bigger dogs today after revising earnings down to $1.25 – $1.29 for Q4 2009. This could be bad for ATVI, but as we’ve espoused here since beginning our coverage of Activision, it is specific titles that are more immune to economic cycles. As we alluded to in our earlier post this morning, Modern Warfare 2 continues to sell at exceptional levels, even as video game retailers are making excuses as to why they are floundering.

Our prediction here is that the bad weather around the holidays coupled with the consumer’s increasing propensity to shop online is what is ultimately going to hurt GME, but leave ATVI unscathed.

Modern Warfare 2 has Continued Holiday Success (ATVI)

As the title says, Modern Warfare 2 continues to hold up through the holiday season. The article alludes to the fact that the success of MW2 is partially offset by the fatigue in the rhythm music sector, but the core logic behind the support of ATVI as a stock to buy still looks to be in place: well-recognized, well-produced games will continue to make money in this economy.

As I stated in my original ATVI writeup (Parts I, II, and III), I anticipate this will be a continuing trend well into 2010. Once we get firm numbers on MW2 sales in ATVI’s earnings, we might start to see the market come to the same conclusion.

Video Games Outsell Movies in UK

Coming from CNET news is an article detailing how video games outsold movies in the 12 month period prior to the end of September 2009. This includes both box office revenue as well as DVD and Blu-ray sales. As per usual, the money quote can be found in the block text below:

“This means that approximately 532 million pounds ($860 million) more was spent on video games in 2009, roughly 30 percent more than on films. And while 1.73 billion pounds is impressive, it’s still well shy of the $20 billion predicted for U.S. game sales in 2009. In fact, the U.S. spent $2.7 billion on games in November 2009 alone.”

This only reiterates the core assumption I have regarding the open ATVI position: video games spending is less discretionary than the market seems to be assuming. As ATVI forces the market to adjust their expectations based on news like this, we should start to see the capital appreciation alluded to in the earlier ATVI postings.

I hope everyone had a safe and enjoyable celebration to send-off 2009 and bring in 2010. Here’s hoping to a happy, healthy new year.

Interview on Gaming Sector (ATVI, ERTS, GME)

I stumbled upon this interview with Colin Sebastian, an expert in interactive media, during my morning reading. He echoes some of the sentiments I expressed in my original ATVI summary. Here’s a quick excerpt of the excerpt:

For Activision, it really boils down to the predictability of revenues and high margins compared to many other game publishers. World of Warcraft and Call of Duty are two of the largest entertainment franchises right now, and we don’t see any signs of these games slowing down. In 2010 Activision will bring to market the sequel to one of the most popular PC games of all time, called StarCraft II. They have an expansion pack as well for World of Warcraft in the second half of the year, and the next iteration of Call of Duty. Keeping in mind that this year’s version, called Modern Warfare 2, is on track to become one of the largest entertainment franchise of all time, we expect a billion dollars in retail revenues for the game.

The full link has some other interesting thoughts on ATVI as well as ERTS and GME that might be useful for someone interested in getting into the video game sector right now.

Activision-Blizzard (ATVI) Part III

Future Events

The video game sector is showing weaker sales. The rhythm-music genre is seeing its profits erode. Unemployment is still an anchor on any economic growth. What makes this company attractive for purchase?

In introductory economics texts, you read about products known as “substitutes.” In essence, two goods are viewed as occupying a relatively similar niche, and while there is always some product differentiation, more often than not it comes down to price. It is helpful to think about American Beer as an example – individuals may have a slight taste preference for Bud Light versus Miller Light, but the consumer tends to drink whichever beer the bar/grocery store has a special on that day.

How does this relate to the video game industry? For the first time, there are individuals entering the workplace who have never existed in a world without Nintendo. For these people in their 20s, playing a video game is as common a way to spend leisure time as going to a movie, going out to a bar, or watching television. The thing that really separates the video game industry from these other discretionary, leisure activities is how cost-effective it is. A video game like Call of Duty: Modern Warfare 2 has 10-20 hours of single player gameplay, with infinite replay value in the multiplayer format. For $50 or $60, this is extremely reasonable. Similarly, players are known to easily log over 2 days of playing time with the Blizzard hit “World of Warcraft.” Again, we see players willing to spend $15 a month for 50+ hours of entertainment.

Does the viewpoint of video games as a cost-effective leisure activity hold up? To an extent. Yes, the sector is down heavily year over year – but Modern Warfare 2 just had the largest launch in video game history. The recession isn’t hurting “flagship” video game franchises. Consumers know that the Call of Duty, World of Warcraft, Starcraft, and Diablo series represent hours of high-quality, cost effective gaming. It is my fundamental belief that with each video game launch in their core gaming franchise, ATVI will persuade investors that flagship video game sales are less discretionary than previously believed.

Sales figures for Modern Warfare II continue to be astronomical. World of Warcraft has yet to show any real deterioration in their subscriber base outside of Chinese legislative issues (since resolved). Starcraft and Diablo are slated for release in 2010 (with a possible push back to 2011). World of Warcraft’s new expansion will be a must-buy for each of the game’s current subscribers. The outlook for this company is bright in 2010.

Summary

Current Price (12/21 Close): $10.98

Target Price: $18

Main Driver: Strong Q4 2009 sales, increasingly resilient sales in core franchises, strong expected Q1 and Q2 2010 earnings

Additional Upside: Yes. If video games are recognized as more of a consumer staple (less subject to economic fluctuations), there is the possibility of larger returns.

Expected Sell Date: Q3-Q4 2010

I have owned ATVI shares since Q4 2008.

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.