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I'm starting a new weekly article today, the Friday Video Game Update. Hopefully I'll come up with a better title at some point, but for now I'll go with clarity over cutesy. I follow the video game sector more closely than most others, so I'd like to provide consistent analysis that you, the reader (hi mom!), can look for every week. Today's topic: Electronic Arts' earnings disappointment as an opportunity to buy Activision. (also found at www.thestocksurfer.blogspot.com.
WHY I BOUGHT ACTIVISION (ATVI) AFTER ELECTRONIC ARTS (ERTS) DISAPPOINTED THE STREET
Electronic Arts, long considered the king of video game publishing, reported earnings Thursday that met estimates to the penny. However, EA's guidance was less than stellar, and as I write this (3:20pm, Halloween Friday) the stock is getting punished to the tune of -17%. Where it will close is anyone's guess in this volatility. But the bigger question for video game investors is this: Should we be worried about the video game industry, or just about EA in particular?
There is plenty to worry about in consumer-land, but as I've written in the past, a growing video game cycle can cause gaming stocks to overcome a recession. Here's a chart showing how ATVI, ERTS, and THQ (THQI) held up from 2000-2004 while the S&P 500 lost ground.
In this case, I consider EA's stock to be a victim of EA itself. Expenses were high, catalog sales were weak, and a game (Tiberium) was killed due to quality issues. The sports games are great (I have Madden 09 in my Xbox 360 right now, literally), but appear to have reached something of a saturation point and can no longer drive growth. Some of the new titles are decent, but I don't see anything on the holiday slate that gets me excited to shop. I read the earnings call transcript on Seeking Alpha, and nothing in it gets me excited to own the stock either. The only reason I'd have to own the stock right now is that EA could become a takeover target, as reported by the Wall Street Journal. But I'd rather own it under $20.
So, as ERTS sold off today, I bought some more Activision. ATVI was down more than -7% in sympathy with ERTS at the beginning of the day--a gift, in my opinion. (ATVI finished the day down -2%.) Activision, unlike EA, is executing well. And it shows in the stock comparison--here's the past 6 months, with the S&P 500 thrown in for comparison.
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Guitar Hero and Call of Duty are still growing, and the new James Bond title is buzzworthy. But the real kicker is Blizzard. With the addition of Blizzard, ATVI will benefit not only from millions of World of Warcraft addicts, but also from StarCraft enthusiasts who are finally getting the sequel they've been waiting for. If you don't think StarCraft is big, just check out this video of a televised StarCraft tournament in South Korea. I especially recommend jumping to the 5:00 minute mark to hear the crowd shrieking and play-by-play announcers yelling as one player wipes out the other.
I'm not fluent, but I think at the end there I heard the Korean for "Do you believe in miracles?!"
No one knows how the combination of Activision and Blizzard will perform, but I think this company has the biggest upside of any video game play because of the Blizzard factor. According to Gamespot, there are rumors of a next-generation Massively Muliplayer Online Game for video game consoles (as opposed to PC), and that could be a huge development, albeit probably a few years out for the next game cycle.
There are risks in the short term. Broadly speaking, the stock market is one big risk with the current volatility. The widely-reported "most difficult holiday season ever" for the consumer is also a risk. The biggest risk in my view is ATVI's earnings report on November 5th. I expect Activision to beat, but the reaction to the news can be unpredictable. Therefore, I'll be looking to to manage my risk heading into the number.
Video game investors and players: See you and your calloused thumbs back here next week!
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