I've been investigating a large number of suggestions from various sources one of them is ATVI (Activision Blizzard), trading today at 10.62. It's true that I'm generally allergic to a P/E of 40, but I've been known to make exceptions for trades or if there really is an insane upside to the company. For instance, Google. With a book value around 1.2 it looks pretty good, except the tangible book value is 4.5. Except ATVI isn't into everything, it's IP isn't crushing all opposition, it's market tactics don't have an inherit competitive advantage, and it's never been under investigation for potentially being a monopoly. For this reason I feel their intellectual property assets are overstated on their balance sheets. One of their chief cash cows, World of Warcraft, sucks. And the disposable nature of video games, even subscription based games, makes me not like this industry as an investment . . . that is until the subscription based model provides persistent renewed value such as electricity, cable, cell phones, and insurance, for the consumer. That is, in order for subscription services to be valuable the customer needs to get as much value out of the service every month in order to continue to subscribe to it, in this case that value is fun and no simple game focused software company currently provides that.
Add to that its persistently negative or near zero profit margins you'd have to be a fool (small "F") to own this company. I guess you could pick it up around (under) 8/share, but it seems pointless if it's not under 4.
While I haven't looked at them in the slightest, I'd prefer Sony or Microsoft for a game industry play. And microsoft moreover since it's tendrils are also in everything.
Update
3/24/2010
Activision Blizzard Inc (NASDAQ:ATVI)
What can I say about Activision Blizzard that hasn't already been said about crack whores. I mean gamers. Gamers, gotta get that strait. Activision had such unheard of greats as Mechwarrior 1 & 2 and it has a new lease on life with it's call of Duty franchise, which people are irrationally exuberant about. I don't know why, (it's probably not "for" me) but it's got a fanatical devotion to it, the same could be said for Guitar Hero and it's ilk. Lets just round it out and say it has approximately 5 notoriously great games that you've probably heard of (though maybe not the ones I've heard of). But Activision is not what I'm interested in here. Blizzard is the company that I've had the honor of playing nearly every game they've ever created and can list all of them but Battle Chess without the aid of Wikipedia: Blackthorne, Warcraft I, II A&B, III A&B, Diablo 1&2 A&B, StarCraft, World of Warcraft A B & C. Or nearly every game they've created since 1994 (Missed the lost Vikings II & Justice League Task force), oh and I would've played Warcraft: Lord of the Clans if they hadn't cancelled it. What I'm trying to say is Blizzard makes great games, and the Warcraft Franchise is probably the most lucrative franchise in existance bar-none. If 8 million of the alleged 11.5 million WoW subscribers are active ATVI is making $104million a month off them, 1.25 billion a year. Since the most recent number there is actually 12 million active subscribers (and they average $13/mo) make that 1.87 billion. Suck it modern warfare.
Price at write up 10.84
Valuation Ratios
Price/Earnings (TTwM) . . . . . . . . . 33.79x
Price/Sales (TTwM) . . . . . . . . . . . . 2.88x
Price/Book (MRQ) . . . . . . . . . . . . 1.26x
Price/Cash Flow (TTwM) . . . . . . . . 12.92x
Held By Institutions . . . . . . . . . . 32.92%
Benjamin . . . . . . . . . . . . 2.8/5
Davison. . . . . . . . . . . . . 3/5: Low Relative strength Rank, 12 month target $12, fair value 14
Marcel . . . . . . . . . . . . . 2/5: Avoid, don't start new shorts, don't buy, bearish trends all around. Expect resistance at 10.97
Thomas . . . . . . . . . . . . 3/5
Insiders. . . . . . . . . . . . . 4 mid level insiders selling significant percentages of thier shares (Median 58.11%)
I should point out that ATVI's total income was only 1,376 million, so lets just pretend 1,250 million of that is from WoW subscribers (since 1.3 billion is less than 1.8) and see that there's no way that all of the "active subscribers" pay anywhere close to $13/month. There must be a lot of prepaid & hourly card users out there.
Though if you discount share buy back they made 72.9% cash off that 1.4 billion income, 44 million (3.2%) if you don't discount that nice share buy back. Comparatively Visa had 2,691 million incoming cash making 9.3% until it laid out 1,000 million to buy back stock and ended up with a negative change in cash.
Microsoft had income of 24,000 million and made 44.4% of that in cash until it repurchased $11,269 million in stock, also with a net loss of cash. So ATVI is making good cash but not taking advantage of all the nice cheap financing (which is probably a huge mistake) the market has available. But we all love cash, and a little cushion is nice if you're bonds aren't AAA rated by S&P
I've actually been blinded to their recent successes, because I don't like thier current games. WoW just seeks to eat up as much of your time as possible and Modern Warfare is impossible online since most users spend 20 to 30 hours (or more) a week playing, and I'm not interested in massive time sinks if it's not massively fun. And then I realized I should be taking money from all these people who have nothing but time and money since I don't have enough of either, and here we are.
Stock price has been poor, but earnings have been rising and debt is approximately zero (as mentioned). And they're repurchasing the stock they issued in 2008 (when everyone had a tough time). AND they started paying a dividend. So basically good, could be better, but good.
On the other hand, at least some people will catch onto doing what I do, buying other people's games for less than retail price using services such as Glyde & Gamestop. This leaves die hard fans of course, and if they continue only to release magic (and they probably will) they should suffer far less than other video game makers, but probably more than the market as a whole. That doesn't change the fact that this stock is under valued, and somewhat volitle. Picking it up now at $10 and selling it at $14+ would be great, but it'd be tough to time (since indicators are bearish) and harder to judge the EV of that action (who knows when it will spring back). So getting it for the right price is key, since it might only be worth $11.25 (Trailing Ten Month Av), with an expected floor of $7.51 and ceiling of $17.50 (2.01x & 3.65x Trailing Sales, based on historical movement).
I really don't think they're going anywhere, but I actually feel like this is more of a speculative play since I believe they're between product cycles and who's going to notice the stock in the near future besides us? Plus, this is a budding staple not a race horse. With a PE of 32+ I'm allergic (per my long standing vow), and I'd love to buy them at around $5.25, but that's never going to happen. I don't think I can buy them for more than $8.75, I'd never above $10.50. So if I was a buyer I'd set my allocation at 2.5% with two-ish trade orders 1/3@10.50, 1/3@8.75, with 1/3 TBA.
As per my due diligence before that however I'd need to research Electronic Arts (ERTS) whose hasn't turned a profit in 3 years & Konami (KNM) who I know basically nothing about other than they make some Arcade style fighting games and Metal Gear.
Until then, hope for downward pressure.
Update 1/5/2011 Close price $12.29
Add to that its persistently negative or near zero profit margins you'd have to be a fool (small "F") to own this company. I guess you could pick it up around (under) 8/share, but it seems pointless if it's not under 4.
While I haven't looked at them in the slightest, I'd prefer Sony or Microsoft for a game industry play. And microsoft moreover since it's tendrils are also in everything.
Update
3/24/2010
Activision Blizzard Inc (NASDAQ:ATVI)
What can I say about Activision Blizzard that hasn't already been said about crack whores. I mean gamers. Gamers, gotta get that strait. Activision had such unheard of greats as Mechwarrior 1 & 2 and it has a new lease on life with it's call of Duty franchise, which people are irrationally exuberant about. I don't know why, (it's probably not "for" me) but it's got a fanatical devotion to it, the same could be said for Guitar Hero and it's ilk. Lets just round it out and say it has approximately 5 notoriously great games that you've probably heard of (though maybe not the ones I've heard of). But Activision is not what I'm interested in here. Blizzard is the company that I've had the honor of playing nearly every game they've ever created and can list all of them but Battle Chess without the aid of Wikipedia: Blackthorne, Warcraft I, II A&B, III A&B, Diablo 1&2 A&B, StarCraft, World of Warcraft A B & C. Or nearly every game they've created since 1994 (Missed the lost Vikings II & Justice League Task force), oh and I would've played Warcraft: Lord of the Clans if they hadn't cancelled it. What I'm trying to say is Blizzard makes great games, and the Warcraft Franchise is probably the most lucrative franchise in existance bar-none. If 8 million of the alleged 11.5 million WoW subscribers are active ATVI is making $104million a month off them, 1.25 billion a year. Since the most recent number there is actually 12 million active subscribers (and they average $13/mo) make that 1.87 billion. Suck it modern warfare.
Price at write up 10.84
Valuation Ratios
Price/Earnings (TTwM) . . . . . . . . . 33.79x
Price/Sales (TTwM) . . . . . . . . . . . . 2.88x
Price/Book (MRQ) . . . . . . . . . . . . 1.26x
Price/Cash Flow (TTwM) . . . . . . . . 12.92x
Held By Institutions . . . . . . . . . . 32.92%
Benjamin . . . . . . . . . . . . 2.8/5
Davison. . . . . . . . . . . . . 3/5: Low Relative strength Rank, 12 month target $12, fair value 14
Marcel . . . . . . . . . . . . . 2/5: Avoid, don't start new shorts, don't buy, bearish trends all around. Expect resistance at 10.97
Thomas . . . . . . . . . . . . 3/5
Insiders. . . . . . . . . . . . . 4 mid level insiders selling significant percentages of thier shares (Median 58.11%)
I should point out that ATVI's total income was only 1,376 million, so lets just pretend 1,250 million of that is from WoW subscribers (since 1.3 billion is less than 1.8) and see that there's no way that all of the "active subscribers" pay anywhere close to $13/month. There must be a lot of prepaid & hourly card users out there.
Though if you discount share buy back they made 72.9% cash off that 1.4 billion income, 44 million (3.2%) if you don't discount that nice share buy back. Comparatively Visa had 2,691 million incoming cash making 9.3% until it laid out 1,000 million to buy back stock and ended up with a negative change in cash.
Microsoft had income of 24,000 million and made 44.4% of that in cash until it repurchased $11,269 million in stock, also with a net loss of cash. So ATVI is making good cash but not taking advantage of all the nice cheap financing (which is probably a huge mistake) the market has available. But we all love cash, and a little cushion is nice if you're bonds aren't AAA rated by S&P
I've actually been blinded to their recent successes, because I don't like thier current games. WoW just seeks to eat up as much of your time as possible and Modern Warfare is impossible online since most users spend 20 to 30 hours (or more) a week playing, and I'm not interested in massive time sinks if it's not massively fun. And then I realized I should be taking money from all these people who have nothing but time and money since I don't have enough of either, and here we are.
Stock price has been poor, but earnings have been rising and debt is approximately zero (as mentioned). And they're repurchasing the stock they issued in 2008 (when everyone had a tough time). AND they started paying a dividend. So basically good, could be better, but good.
On the other hand, at least some people will catch onto doing what I do, buying other people's games for less than retail price using services such as Glyde & Gamestop. This leaves die hard fans of course, and if they continue only to release magic (and they probably will) they should suffer far less than other video game makers, but probably more than the market as a whole. That doesn't change the fact that this stock is under valued, and somewhat volitle. Picking it up now at $10 and selling it at $14+ would be great, but it'd be tough to time (since indicators are bearish) and harder to judge the EV of that action (who knows when it will spring back). So getting it for the right price is key, since it might only be worth $11.25 (Trailing Ten Month Av), with an expected floor of $7.51 and ceiling of $17.50 (2.01x & 3.65x Trailing Sales, based on historical movement).
I really don't think they're going anywhere, but I actually feel like this is more of a speculative play since I believe they're between product cycles and who's going to notice the stock in the near future besides us? Plus, this is a budding staple not a race horse. With a PE of 32+ I'm allergic (per my long standing vow), and I'd love to buy them at around $5.25, but that's never going to happen. I don't think I can buy them for more than $8.75, I'd never above $10.50. So if I was a buyer I'd set my allocation at 2.5% with two-ish trade orders 1/3@10.50, 1/3@8.75, with 1/3 TBA.
As per my due diligence before that however I'd need to research Electronic Arts (ERTS) whose hasn't turned a profit in 3 years & Konami (KNM) who I know basically nothing about other than they make some Arcade style fighting games and Metal Gear.
Until then, hope for downward pressure.
Update 1/5/2011 Close price $12.29
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