Ten Reasons To Buy Activision Blizzard

Call of Duty Modern Warfare 2

1.Activision released the highly anticipated game Call of Duty: Modern Warfare 2 last week and racked up $310 million in sales from the United States and United Kingdom over a 24 hour period. To put this in perspective the blockbuster Batman movie Dark Knight brought in $155 million during its opening weekend. With Christmas right around the corner, the final sales numbers for this edition of Call of Duty are going to be much bigger.


2.World of Warcraft: Cataclysm for the MMORPG (Massively Multiplayer Online Role Playing Game) World of Warcraft (WOW) is expected to be released in 2010, bringing two new playable races to the 11.5 million active users who pay every month (or by the hour in China) to continue playing World of Warcraft.


3.The Blizzard division of Activision that created WOW also has another potential blockbuster game called Starcraft 2 scheduled for release in the first half of 2010. More than a decade after the release of the original Starcraft game millions of people are still playing it on Blizzard's online service called Battle.net. Starcraft 2 will be split into 3 games called "StarCraft II Terrans: Wings of Liberty", "StarCraft II Zerg: Heart of the Swarm" and "StarCraft II Protoss: Legacy of the Void". Given that WOW: Wrath of Lich King sold 2.8 million copies in the first 24 hours after its release and went on to become the best selling game in PC history in 2008, sales of these three titles are probably going to be impressive as well.


4.Activision's line up of franchises like Guitar Hero and Call of Duty continue to perform well. According to Activision's CEO Bobby Kotick Guitar Hero was the year's "#1 best-selling third-party franchise in North America and Europe" through September 2009.


5.With the increase in mobile gaming both from regular devices like the Nintendo DS and smartphones like the iPhone, Activision gains additional distribution channels for its content. Shortly after the release of Call of Duty: Modern Warfare 2, the company released a pared down version of the game for the iPhone called Call of Duty: World at War: ZOMBIES. I may consider posting a review of the game on my iPhone apps related website AppStruck.com


6.Shifting gears beyond the product to what makes the stocks interesting, the company reported better than expected results when it reported third quarter results, gained 3.1% market share and ended the quarter with $2.7 billion in cash and investments and no debt.


7.The company repurchased nearly a billion dollars of its own stock ($960 million to be precise) as of 9/30/09 out of a $1.25 billion share repurchase program.


8.Activision reiterated its earnings target of 26 cents per share for full year 2009 on a GAAP basis. On a non-GAAP basis, earnings are expected to be 63 cents per share. The discrepancy between the two is primarily on account of deferred revenue related to online games like WOW. Activision has to spread out revenue from such games over the life of the subscription instead of when it actually makes the sale.


9.Using the non-GAAP revenue number of $4.5 billion and earnings of $0.63, we get a forward P/E of 18.55 and P/S of 3.3. Backing out the $2.7 billion in cash and investments from the $14.83 billion market cap, I arrive at an enterprise value of $12.13 billion and an EV/Sales ratio of 2.7. I have no qualms about paying under three times annual sales for a company that expects to post (non-GAAP) operating margins of over 25% for full year 2009.


10.A CEO who turned a $440,000 investment into the largest gaming company with a market cap approaching $15 billion over nearly two decades despite never having picked up a joystick.