I have been following Activision-Blizzard (Nasdaq: ATVI) for years. If anybody else has followed it for the last few years, then you know there is cause to celebrate. For an ATVI follower, this is a historic time of 52-week highs outside of a tight range. The stock is pushing into the $14s. Heart of the Swarm is coming, and November 2013 will probably see a new Call of Duty game. To commemorate this I want to go over why ATVI is the best in its industry, and how it will stay that way. I generally have used cash-secured puts instead of owning the stock out right. It gave a nice return over time. Prior to that I would use some covered calls to collect even more premiums. The stock was barely able to hold $12 for the longest time, and $13 was almost a dream, but the premiums were still acceptable.
Cash and Debt
I will say it until I am blue in the face. All the fancy metrics, unique ways to see how a company is doing, and voodoo economics will not change the fact that having a lot of cash and little debt is a good thing. A company that has not grown in years but with billions on the balance sheet but no obligations is better than a heavily indebted company that is seeing growth, at least on a prima facie basis. Those cases are exceptions. ATVI has no debt and over $4B in cash.
Electronic Arts (Nasdaq: EA) has around $1.5B in cash. That is a respectable number as well. It is not over $4B though. EA also has around $550M in debt. It is far less impressive. At least EA has more diverse titles, which I will get into later. Take-Two Interactive (Nasdaq: TTWO) brings up the rear with about $450M in cash and $330M in debt. TTWO has a new GTA game coming in the fall, which has a massive budget and will be marketed heavily. This month Take-Two has BioShock Infinite coming out, and I am eager to see sales. My gut tells me to avoid TTWO. It is posting losses, though those losses have not adversely impacted cash. ATVI is the clear winner here.
Make no mistake about companies, all the metaphysical metrics in the world do not mean anything without a product. You could have the ideal amount of inventory on the balance sheet, but if your products stink it will not save you down the line. Activision has little problem emptying its warehouses and a lot of sales are purely digital now, which saves on warehouse and inventory costs. StarCraft is coming out soon, and should see a lot of demand from buyers of the first game. I got my pre-order. The story is top-notch so I think people will want to see it continue, and there is multiplayer. They made us wait forever for the next part.
ATVI also has the Skylanders franchise, which will be seeing competition from Disney Infinity. I do not think this will do too much harm Skylanders. I think having Disney jump in will expand the market instead of just dividing it. Skylanders is also leading ATVI’s mobile Activate platform, but no new information about that has been forthcoming.
Activision’s franchises are huge. Call of Duty breaks records, as do the Blizzard franchises. Skylanders is for the kids and I do not keep up with the details. Electronic Arts has greater diversity in their titles, and more of them. This gives EA more regular income, versus ATVI’s intermittent deluges.
EA also has its fair share of important titles like Need for Speed, Crysis, and The Sims. Crysis has not become as massive of a franchise as I expected it to be after the first game, but it is still a popular title. EA does not have over $4B in cash, and does not seem to be headed there right now. ATVI has a dividend, massive profitability you can see, and evidence of past success in the piles of cash.
Take-Two has one of the biggest franchises in the industry with its GTA franchise. The game costs a ton to develop, but sells like crazy. It is also DLC-friendly and more missions and content can be added. GTA is an open world game and there could be a ton of DLCs, unless it was hard to get the voice actors back after a few years. Mass Effect is linear but it has a ton of DLCs. Mass Effect is a EA franchise via BioWare, but now that the trilogy is over it could be a while if there even is a future. Other Take-Two titles include Max Payne, Bioshock, Borderlands, and Red Dead Redemption. All of these titles are well known, and many are well received and reviewed.
GTA V is projected to sell 18 million copies in the same fiscal year it is released. Despite the budget and the marketing, TTWO should still be adding a ton of cash to the books, but it is the only Take-Two title of that caliber from a sales perspective. Quality-wise Take-Two does have other impressive titles. I would stick to ATVI, because it has a couple of really huge franchises..
ATVI is the cash machine here, but it is very vulnerable to a miss when it comes to games. It is like Apple a few years ago when most of Apple’s sales were iPhones. If one model of iPhone ended up being terrible it would be devastating. If ATVI misses on one of its games and actually loses money on it, then it does not have a slew of titles to pick up the slack. ATVI is tight-lipped about sales. I would be interested in knowing how many people bought Wings of Liberty now that Heart of the Swarm is coming. StarCraft revenues can push ATVI into the $15s and $16s. It will materialize over 2 or 3 quarters, but then ATVI will follow it up with another huge blockbuster title.