Is This Gaming Stock Cheap Enough to Buy?

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With shares of Activision Blizzard (NASDAQ:ATVI) trading around $10.72, is ATVI a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementCall of Duty

Activision Blizzard posted third-quarter results on November 8 that surprised Wall Street. Revenue rose 11.5 percent to $841 million from the quarter in 2011, while adjusted earnings per share of $0.15 beat mean estimates of $0.07. But that didn’t stop the stock from hitting a new 52-week low of $10.66 on November 9.

On Tuesday, the company will release the new iteration of “Call of Duty” and hope to score big after raising its fourth-quarter earnings guidance to 18 percent EPS growth year over year. In the company’s third-quarter release, CEO Robert Kotick said that he believes the game “will be one of the most successful launches of any form of entertainment in history.”

E = Equity to Debt Ratio is Close to Zero

Activision Blizzard’s debt-to-equity ratio of zero looks pretty good in any light. The company is sitting on a cash pile of $3.36 billion and no debt.  Activision blizzard almost has enough cash to match Electronic Arts’ (NASDAQ:EA) market cap of $2.97 billion. EA has a debt-to-equity ratio of 0.25.

T = Technicals on the Stock Chart are Weak

As of November 12, the stock price is 3.2 percent below its 20-day simple moving average, or SMA; 6 percent below its 50-day SMA, and 9.68 percent below its 200-day SMA.

Since the beginning of 2012, the stock has been in a downward trend, losing 11.72 percent this year to date, and 15.26 percent year over year. This compares to a 38.83 percent year-to-date loss for and a 45.48 percent year-over-year loss for Electronic Arts.

The stock is trading in a 52-week range of $10.66 to $13.01.

E = Earnings are Increasing Quarter over Quarter

Despite tanking on revenue, Activision Blizzard managed to substantially increase revenue coming through 2008, the same year Activision acquired Vivendi games to become the world’s second-largest gaming company by revenue after Nintendo.

2007 2008 2009 2010 2011
Revenue ($) in millions 1,349 3,026 4,279 4,447 4,755
Diluted EPS ($) 0.19 (0.11) 0.09 0.34 0.92

 

Revenue projections for 2012 predict modest growth to $4.8 billion, with EPS rising to $1.11 per share. Projections for 2013 look weaker, with revenue falling to $4.6 billion, and EPS falling to $1.00 per share.

Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 754 1,407 1,172 1,075 841
Diluted EPS ($) 0.13 0.08 0.34 0.16 0.20

T = Trends Support the Industry in which the Company Operates

According the Entertainment Software Rating Board, 67 percent of U.S. households play games an average of 8 hours per week. The computer and video game industry pulled in combined revenue of $10.5 billion. It should be noted that Activision Blizzard’s blockbusters are computer games, which pull in far less money than video games. The global game market value in 2011 was $65 billion.

The real annual growth rate for the industry between 2005 and 2009 was 10.6 percent, way above economic rate of 1.4 percent. Mobile and social gaming make up a portion of that growth, but there is no evidence suggesting that companies like Zynga (NASDAQ:ZNGA) will seriously cut into growth prospects for Activision Blizzard.

Zynga has proven its revenue model and user base to be rather nebulous, where Activision Blizzard has five running years of solid revenue growth. Growth has slowed down since 2009, but appears to be leaving the bulls behind and heading into steady territory, as opposed to entering bear territory.

Conclusion

The share price has tumbled over 11 percent this year to date, but most analysts still hold a “Buy” or “Strong Buy” on the stock. The mean price target is $15.18, suggesting solid upside at its current price of $10.77.

The company has a history of producing winning titles, and has several franchises that promise to keep generating revenue for the foreseeable future. A push for digital sales is also increasing the company’s profit margins, currently standing at 18.51 percent.

Because of this, and the metrics above, Activision Blizzard is an OUTPERFORM for long term investors. Currently trading near lows, catalysts including the “Call of Duty” release are likely to drive this stock toward analyst estimates.

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