Activision-Blizzard (ATVI): The Long Case and Caveats

I love Activision-Blizzard (Nasdaq: ATVI) for both its games and as a company. However, I have been looking at many game companies in the wake of THQ’s bankruptcy. There are concerns I have about ATVI. Most likely they will prove unfounded as the company has done well for years and there is no reason for that to stop. However, being the best can make you lazy too. I will start explaining why I really like ATVI, and then go over issues for the company and the industry.

The Long Case

The number one strength of ATVI is its commitment to quality. Having a strong portfolio of games is good too, but Call of Duty was just another in a line of shooters. It was the care and detail that goes into the creation of those games that made it into the flagship title it is today. Medal of Honor from Electronic Arts (Nasdaq: EA) did not get the same fate. Battlefield is not a good comparison because that is a different kind of game.

English: Logo of Activision Blizzard. (Photo credit: Wikipedia)

ATVI also has strong upcoming titles. I cannot have been the only adult gamer to completely miss Skylanders and its success. The studio that developed the game is actually a subsidiary of ATVI and not a third party developer. Skylanders represents the resurrection of the Spyro the Dragon series. Other upcoming games are the StarCraft expansions, possibly the next Modern Warfare game, and probably more WoW expansions. There are other titles like a Spiderman game coming out, but these will have to stand on their own merit and are not guaranteed blockbusters.

ATVI has a lot of cash and no debt, which is a major reason I like it. Being profitable and having a fat bank account is a great position to be in. Your cash is not a cushion until you can right the ship, but instead it is a tool for the company to purchase or license new opportunities. I am not suggesting bold acquisitions as much as developing some new IPs for franchises whether from outside or through internal development. I place more emphasis on the products than the internals of the company, though the cash and dividend do not hurt. A company with a strong balance sheet will lose it if it does not continue with high-quality products that consumers actually buy, which is what brought THQ down. High quality products that not enough people wanted to buy was the splinter in the paw for THQ.

ATVI is launching its own social gaming platform called Activate, which is probably in opposition to EA’s Origin. ATVI seems a little bit late, but as long as they actually make good games it should do well. I think it is a bit early to judge the success, but considering that The Simpsons Tapped Out is doing really well it could open up new revenue streams. Mobile is effective in the aggregate, and profits and margins will increase but the lions share will be games like Black Ops. I am pretty dismissive of mobile gaming, but not of the quality games.

I am still on the fence about EA, I know it was recently downgraded, which is actually a reason to look at the stock in a bullish light, since the market tends to overreact. With the continued weakness of the industry I would avoid EA simply because I would rather go with ATVI. Also, I think Crysis 3 will do well, but will not be a record breaker. Dead Space 3 is a tossup, but I am leaning negative just because survival horror is not what it used to be.

Caveats

I will give the company a little credit on the Spyro resurrection, but what else has it done that is really impressive. You cannot pump Call of Duty for all its worth. New properties have to be created. The video game slump is hitting the industry hard, and ATVI has been wielding the hatchet when it comes to studios. Prototype 2 led to a studio being shutdown. The game did not perform that badly, but it really was not an improvement over the original.

The most successful games for ATVI have been sequels, and I find that troubling. You cannot keep milking franchises and expect people to keep coming back unless it is in a unique niche like sports games. Great franchises have fallen in the past, and sometimes they can be rebooted, but generally you want to keep things fresh. No one is as excited by a Doom game as its storied history would suggest. Call of Duty really came into its own when it broke out of the WW2 mold. It is staying ahead of the market that leads to success.

StarCraft Trumps BioShock

She is human now, but man is she PO’ed.

I just realized that Heart of the Swarm will be coming about two weeks before Take-Two Interactive‘s (Nasdaq: TTWO) BioShock Infinite. I know timing is not as important to games, since you could buy both and play them at different times. However, I think these tough economic times will force people to choose, at least at first. I was not expecting much from BioShock anyway. I think the timing of the releases will weigh on sales or at least weigh on market psychology. I fully expect Heart of the Swarm to sell at least as many units as Wings of Liberty, if not more. People like me that bought the game later last time will be buying this one right away to continue the story. Battle.net is up and running now and no one wants to be left behind.

Take-Two is a sell or avoid in my book. I know GTA V is coming soon enough, though delays are not unheard of. Any weakness resulting from BioShock will present a nice opening to play a GTA pop, but in the long run I do not see enough good stuff to warrant a long hold. If the company is silent about sales after BioShock Infinite comes out I will take that as a negative sign. Also, I think marketing costs will weaken even positive earnings.