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Help!! I am falling in love with ActiVision Blizzard...


anders
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...and I need others to tell me not to rush in and marry her.

 

"Forget about market share -- what you want is share of mind" Buffett said during his MBA speech...

 

I am a fan of the gaming industry -- started with the commodore64 and the development within the industry has been an incredible voyage.. Not long ago ActivisionBlizzard's (ATVI) CEO Robert Kotick said:"There are a lot of new social gaming companies that are emerging and take mindshare -- not from our consumer, [because they're] a different demographic"...

For me, this statement means that Kotick 'gets the point' and is on the path of creating a good portion of mindshare within the gaming industry and, with currently over 12 million players of World of Warcraft (WoW), record-breaking sales on 'call-of-duty', it seems that he is on the right course.. About half of those 12m WoW players, are Asians paying approx 6 cents/hour and half are from europe & usa paying 12-15 USD per month putting the total WoW subscription revenue at around $1.04 billion..

 

Jumping to another angle: ATVI have experienced a multiple compression from an 5y average of approx 60 to today's 15 (forward looking).. Owner earnings have gone from 350 in 2007 to around 950 in 2010 (calculated on half-year earnings then adding 50% half-year earnings).. The owner earnings growth has been 30,5% during last 9 years, 28,5% during last 5years, 38,2% during last 3years so if we would do a DCF (to illustrate the point) with an input of growth 10% and discounted at 15% we would get a price around 12usd. Reverting instead -- with a current market-price at 11, it means that mr market believes that the company will grow at 2.5% at a 10.5% discount.

 

Jumping to the balance: They have a current ratio of 3,64, no longterm debt.. Yes they do have a lot of goodwill and other immaterial but adding back treasury stock to the book value, it doesn't seem so bad. Moreover, the managers own a quite large stake in the company, ATVI buy back their stock, the purchase price provides a margin of safety, with a assumed growth rate of 10% and cash yield of 7% I feel I have a quite attractive lady.

 

I have a large stake in the portfolio and I have become blind of love for this company..."All I want to know is where I am going to die so I'll never go there".. Everybody here can read a financial statement and I would love if someone could give me a hint 'where I am going to die' with ATVI.. ::)

 

All the best,

 

/A

 

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anders,

 

You're idea sound interesting. I'll take a look at the story and the numbers.

 

I've been a fan of video games, especially in the 80's. This is an industry that change fast. Think about the Commodore, Intellivision, Atari, Coleco, Nintendo, Sega, Playstation, etc. etc. etc.

 

There is some games that last in the minds of people, like Legend of Zelda, Mario Bros, World of Warcraft, etc. but there is a lot of fads too.

 

How can the Activision moat can be maintained over time? What will protect the company from it's competitors over a long period of time? In other words, what will happen after your honeymoon? Will it be a long standing marriage?

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I looked into this a few months ago.  I thought the release of Starcraft II would really help earnings.  Starcraft will be released as the core game and three patches so they are defiantly trying to gt their money's worth.  The main reason I stayed away from the company is the World of Warcraft cash cow.  What happens when the phenom is over?  Their other games are not subscription based and their revenue is going to get very lumpy when WOW dies.  I look at this as if I am buying KO but Cocacola will be discontinued in a few years.  I mean sure, they have other soft drinks but what will be their new cash cow?  Will Cola lovers start drinking Pepsi Cola instead?

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for me this is a hits biz, this type of biz i would need larger than usual amount of margin of safety

 

 

 

I agree. This is certainly a hits business. Look at ERTS. A few years ago, the clear, dominant player. Now, it's 2nd place by a wide margin as judged by market cap. Look at Midway, creators of Mortal Kombat, out of business, Acclaim, etc.

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Anders,

 

I'm an old school gamer too.  Started with the Atari 2600 and was a big Commodore fan--had both the 64, and Amiga 2000.  There is currently a big backlash against Activision, especially their CEO, at the moment in the gaming community.  Check out this link:

 

http://uk.xbox360.ign.com/articles/112/1123641p1.html

 

more commentary here:

 

 

This is not a one off thing I'm noticing, but a growing trend.  Almost every week I'm seeing Activision/Kotick bashing in the gaming community.  And they have done some unethical, douche-baggy things to a group of developers at their Santa Monica office.  The negative reputation they're building, I think, will bite them in the ass someday. 

 

Of course, that's not worth a damn when you consider Microsoft was engaged in all sorts of douche-baggery as it became the largest software company in the world.  And, at the time, everyone hated the company.  However, Bill being the cutthroat brilliant CEO, managed the company in a ruthless manner to dominate the industry.  Although, we are now seeing the ass biting: IE has dropped below 50% of the market and the trend is heading lower.  Apple has overtaken MSFT as the largest computer company in the world, and its market share is growing--Apple has clearly taken advantage of the negative Microsoft perception.  People are starting to realize open source, such as Open Office, are good replacements to MSFT's products (looking at the recent market share shows declining trends for MSFT).  MSFT hasn't gone anywhere in the past 13-14 years. 

 

Kotick has turned Activision into the biggest gaming company.  They've overtaken EA, bought out Blizzard in a brilliant swoop, and Kotick is trying to build the company into a gaming behemoth.  They have several big franchises that you and I are aware of and a big lineup of games coming up this year (COD and Starcraft).  But, I believe there is an Apple in the wing.  Valve and Steam, I think, could be it.  Although this is a competitive monopoly with multiple suppliers with distinctive products and loyal fan base, with games becoming more expensive over time ($60 for a new game is getting really pricey), the winner will be one that has a low cost distribution model with lower cost games.  Steam provides that platform.  Every time they have sales the games are ridiculously cheap.  They just need to push this platform onto the consoles.

 

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Thanks for all great posts  :)

 

- Valuegeek: Im not sure about 'several hundred millions of insider selling' -- pls see insidercow.com for information.. Sure insiders are selling but not enough to cause my stomach to churn.. Kotick exercised options and then sold them, I think these options come from the vivendi deal.. If you want scary nrs then take a look at Apple insider selling.. In general, I dont think insider selling info give you much (if it does not occur at 52 week low) There are many reasons to sell, buy a new house, boat, fund children's collage etc etc.. But there are only one reason to buy a share -- the expectation to earn money.

 

- About the hits biz, WoW has been around for 16 years.. take a look at the subscriber nrs below:

According to Blizzard:

12.0 million Oct 7 2010

11.5 million Dec 23 2008

11.0 million Oct 28 2008

10.0 million Jan 22 2008

9.0 million July 24 2007

8.0 million Jan 24, 2007

7. 0 million Sept 6, 2006

6.0 million March 2006

According to MMOGData:

5.5 million Dec 2005

0.75 million Jan 2005

0.25 million Jan 2004

I would not call this a fad, something that just will go away...and with the new expansion pack launching dec 2010, there are good chances that the trend will continue..

 

- Ross812... why would WoW 'just die' ?? About the KO argument... Here is a small piece from brk shareholder letter 1993:

 

--- I can't resist one more quote from that 1938 Fortune story: 

"It would be hard to name any company comparable in size to Coca-

Cola and selling, as Coca-Cola does, an unchanged product that can

point to a ten-year record anything like Coca-Cola's."  In the 55

years that have since passed, Coke's product line has broadened

somewhat, but it's remarkable how well that description still fits ---

 

Sales of syrup in 1896 were 116,492 gallons versus about 3.2 billion in 1996. Coca Cola probably has a very bright future ahead of them.  ;)

 

- Partner24: Great questions.. That is what I am trying to figure out.. will the moat expand or contract ?

ATVI has given a hint that they may wish to utilize blizzard to take console games such as CoD to subscribe basis which is interesting..

I think they will be able to raise prices in line with inflation and I think the industry is fairly immune against mood swings in the economy..

 

-Oplhlman2: I think ATVI will try to push their console business to their blizzard platform.. The 'apple effect' is really interesting.. wasnt apple like msft 20 years ago, when msft started to grow bigger and bigger ?? maybe one should start adding msft shares over the next coming 20 years  ::)

I think you are right about Steam and Valve... they could pose a serious threat.. or maybe ATVi just buy them out?

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-Oplhlman2: I think ATVI will try to push their console business to their blizzard platform.. The 'apple effect' is really interesting.. wasnt apple like msft 20 years ago, when msft started to grow bigger and bigger ?? maybe one should start adding msft shares over the next coming 20 years  ::)

I think you are right about Steam and Valve... they could pose a serious threat.. or maybe ATVi just buy them out?

 

Geez.  I hope not.  I think the gaming community would be in an uproar if that happened.  It seems everything that ATVI has been touching lately has turned to s*#(...for the gamer, that is.  I would be one sad panda if that happened. 

 

No, I think IBM was more like MSFT 20-30 years ago.  Apple had some glory in the early days of the Apple II and IIe.  The downfall happened with the IIGS and Mac.  Both were good computers, but C64 just owned them outright.  Jobs left to start NeXT and Apple nearly went bankrupt in the 80's-90's.  He is responsible for turning it into a consumer powerhouse.  The way he did it was through mass appeal.  Not cutthroat business tactics.  Which makes me think that ATVI is in a different league.  I mean, how do you take a commoditized thing like a intel based laptop or mp3 player and make it instantly differentiated?  That's a rhetorical question. 

 

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The thing that impresses me about Blizzard in particular is the discipline.  What the *? am I talking about?  The discipline not to release a product before it's ready and the game play is amazing.  Starcraft II was slated for release about 2-3 years ago if I remember right.  But they kept delaying the release until they got it right.  Can you imagine the discipline and guts it took to make that happen, especially in a public company?  That to me is a huge competitive advantage.  Gamers love games with fantastic gameplay, and you just don't get that if you have to meet a tight schedule and have to ship.  But then the rewards when you do ship a great product are extraordinary.  I think that the fact that there is WoW and now Starcraft online too (although I don't know the details here) also means that there is a slow building base of recurring revenue that isn't reliant on the stream of hits.. Oh, getting back to the hits.  I agree that this is a hits business.  Which makes it all the more important that they get the gameplay right.  Once again meaning that the willingness to make a game that will play wonderfully will mean they are more consistent when it comes to hits...  Now take this all with a grain of salt as I'm an ex gamer who just doesn't have time to play SC II anymore.. too many family responsibilities.. but I have been reading the review, salivating, hoping for the day I have time to crack SC II open...  I hear they just release Civilization 5 too!  sigh..

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I would argue that WoW could just "die"  It takes ONE hit morpg to dethrone WoW.  Please study Final Fantasy XI or what was it again..... oh, EverQuest?  12 million players can evaporate in 2 years if another firm comes out with the *new thing.  Comparing WoW to Coke is naive.  I was stating how Coke would lose market share if they discontinued a cola.  WoW has no where near the moat of the beverage.  Colas are given to young children and the affinity for the beverage is developed throughout life; Buffett still loves Cherry Coke.  The majority of WoW players are young and start playing in their teens.  At some point the majority of these gamers have to grow up and enter the real world.  Blizzard relies on a steady stream of new users to replace the old retiring players.  Membership is growing right now, but what happens when the membership is saturated?  Furthermore, what happens if the young players get hooked on MORPG II instead of WoW?  I agree that ATVI is innovative but the lions share of their revenue comes from one source.  If they had three or four games with 3 million players a piece and growing (with additional games in the pipeline) I would be much more comfortable with the investment.  You are investing in a pharma and your blockbuster drug patent IS going to expire sooner or later.   

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Thanks for all the inputs  :)

 

Ross, i misunderstood your argument with coke, sorry about that..

 

I believe that WoW will continue to grow.. subscribers have grown with 1.5-2 million per year since 2004 hence it is not illogical to assume that this will continue.. about 6 million subscribers are in asia and new gamers are entering the arena.. Sure, at some point gamers must enter real life but many play different games from age 10 to 35 which consequently gives a stream of potential cash flow for 25 years. And this is just one leg in the business, CoD is growing, Starcraft is growing, Guitar Hero is growing, Dj is growing and more.

 

But I also come to realize that the industry is changing faster then I previously thought so there are reasons to be cautious.

 

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Hey guys, it is a great discussion you guys have going on here. I actually registered on this form because of this thread, don't worry I plan on posting more in the future.

 

  I think WOW will eventually die out but I am sure the new expansion will provide life for WOW for few more years. One thing to note is Blizzard is developing another MMO and it will be a new franchise, (no starcraft mmo). Also one thing people have forgot to mention is bungie is partnering with activision to make a game which will be a new franchise. There are lot of games left in the pipeline.

 

  The problem with ATVI is the activision side is weak because their pipeline is now old/stale with too many guitar hero and tony hawk games. I am sure the new COD will sell well but it will one day meet the same fate. Who knows what Activision will come up next but they need to have some new franchises in the future so it doesn't have to rely on Blizzard to create hit games.

 

  Also Bobby Kotick has been a great CEO but sometimes he can be too businesslike which has gamers divided. So he needs to be a little quiet but nonetheless he has done a great job turning the company around.

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Also a possibility for atvi is to acquire Take Two. It would increase the pipeline. If you look at Take Two, the shares have been cheap. Carl Icahn has been loading up. Even though the failed takeover from EA did not work but there could something in the works in the future. ATVI would have enough cash to buy them out.

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