Stock Ticker: Activision Blizzard
Bobby Kotick's pronouncements may infuriate gamers - but do they really delight investors, as is so often claimed?
Having covered the most valuable games company in the world, Nintendo, in the first instalment of this series a few weeks ago, let's now look across the Pacific to the second most valuable - Activision Blizzard.
In a sense, it's extraordinary that a third-party publisher could even come within knocking distance of challenging the valuation of a successful platform holder of Nintendo's stature. There are certain financial considerations to bear in mind with regard to that - not least of which is that Activision is listed on New York's technology-stock focused NASDAQ, whose investment culture is a world apart from that of Japan's markets - but it still stands as a testament to the sheer strength of the franchises on which Activision has built its business, being primarily Call of Duty and World of Warcraft.
Activision, in contrast to the companies I've focused on so far in this series, hasn't had a bad year at all. Its graph over the past year is a bit bumpy, certainly, but there's a clear seasonality to it. ATVI's valuation peaked towards the end of 2010 as the extraordinary success of Call of Duty: Black Ops became apparent, before falling off through spring and summer - only to begin an even sharper rise as autumn rolled in and excitement began to build around Modern Warfare 3.
That's where we stand now with Activision. The stock is trading close to $13, which would be the highest price it's reached since the financial crash of 2008. If last year's trend is repeated, though, it's likely to grow through the next couple of months as well, and some US analysts suggest that a price target of $15 is reasonable. That would actually bring Activision's stocks up beyond the levels it was trading at following the announcement in late 2007 of the merger with Vivendi (and thus, more importantly, Blizzard). The company's shares shot up at that time, and traded at around $14 for several months before heading skywards to roughly the $17 mark when the deal went through in July 2008.
For investors, NPD's headline figures are cold facts, and can't be healthy for Activision's share price.
Those gains were wiped out in the wake of the financial crisis, but three years later, Activision appears to be on the verge of returning to its pre-crash levels - a feat to which few companies in the games business can lay claim. To do so in the face of the constant flow of negativity surrounding retail game sales is even more impressive. Industry insiders know, of course, that much of the lost retail sales are instead flowing through digital channels (and that the rise of revenues from digital distribution, freemium, subscription and other such models probably even outweighs the decline of retail), but for investors, NPD's headline figures are cold facts, and can't be healthy for Activision's share price.
Yet it's worth noting that in spite of its steady performance (and the Buy ratings maintained by many analysts for the stock), Activision isn't entirely a stock market darling. In recent months, certainly, it's done very well indeed, but the reality is that for most of the past 12 months Activision has actually been underperforming the NASDAQ index on which it resides. The following graph is rather lenient to Activision, I should add - it covers exactly 12 months of data, so it starts in the mid-point of the publisher's seasonal rise. If you move the starting needle back only a few weeks, the percentages shift to show that the NASDAQ's rise in the closing months of 2010 actually significantly outperformed Activision Blizzard's. As you can see in the graph reproduced here, ATVI tumbled in the months after Christmas, while the NASDAQ remained fairly healthy until it fell off a cliff in early August, leaving Activision leading the market by the end of the graph.
What's going on here, then? It's clear that investors aren't exactly negative about Activision - if they were, you'd expect there to be a lot more movement in the stock, most of it downwards. However, something definitely constrained the price growth of the industry's biggest third-party publisher this year. Could it have been general negativity around the games industry in particular, as distinct from the tech sector as a whole (which is what the NASDAQ composite index effectively tracks)?
The straight answer is no - and here's where the figures get really interesting, and perhaps a little surprising. Activision Blizzard is the industry's 800 pound gorilla, and keeper of what are, right now, the two most valuable franchises in gaming in the form of CoD and WoW. It's got a CEO, Bobby Kotick, who's no stranger to controversy among gaming consumers for his forthright and often confrontational style, which is conventionally explained away as being "what the markets want to hear" - the idea being that Kotick as CEO is making decisions that aren't designed to please the gamers who buy his products, but rather to delight the investors who buy his shares.
Yet, if you stack Activision's share price performance over the past 12 months against its two largest US rivals in third-party publishing, this is what happens:
The contrast is stark. Activision is on a growth curve, but when you place it alongside its (smaller) rivals, its curve largely flattens out. Not only has it been mostly underperforming the NASDAQ, it's also been underperforming the companies whose business models most match its own - Electronic Arts and Take Two, long-established publishers who rely on sales of boxed software for the majority of their revenue.
Again, there are various financial and market-related aspects to take into account when looking at that graph. The first and most obvious is that EA and Take Two are smaller companies than Activision Blizzard: EA has a valuation around half that of its larger rival, while Take Two's market cap is around one-tenth that of Activision. As such, they're more inclined to be buffeted about by general market trends than the larger company would be, as is clearly visible especially in the huge slump that hits both companies in mid-August. You can see it on Activision's graph as well, but it's not very pronounced - by glancing back at the NASDAQ graph we can see that it's a general market drop, one which Activision's size nullifies to some extent but to which EA and Take Two alike are more vulnerable.
However, while considering that aspect might smooth out the lines on the graph somewhat, it doesn't alter the fact that EA and Take Two are dramatically outperforming the NASDAQ, while Activision has only nudged slightly ahead of the composite index in the past couple of months. Why is that?
The answer lies back in the most fundamental aspect of how markets work: they reward growth, and get excited about growth potential. Activision Blizzard operates the most successful and profitable massively multiplayer game in history, and remarkably manages to keep its subscription numbers well over 10 million even after so many years on the market. But WoW is a known entity, its parameters baked into ATVI's valuation already, its potential for growth fairly limited. Bioware's The Old Republic, on the other hand, could give EA several million dedicated MMO subscribers, a whole new business bringing a fresh cashflow to the publisher. It's easy to see which of the two things investors will be more excited about.
EA and Take Two are actively trying to create huge new franchises, and far from running off to find safe harbour with the likes of ATVI stock, the markets are rewarding their risk-taking
The same logic applies, for example, to the present high-profile spat between Battlefield 3 and Modern Warfare 3. Nobody with the slightest bit of insight doubts that Modern Warfare 3 is going to be the better-selling game - quite possibly matching its older siblings to join the ranks of the best-selling games of all time - but Activision always releases a massive Call of Duty game for Christmas. EA's challenge to the franchise promises to give Battlefield 3 a huge sales boost, even if it's unlikely to dent CoD's figures much in the process. Again, investors care more for EA's growth than for Activision's sustained but familiar success.
What the market data suggests, more than anything else, is that investors see Activision as extremely solid. There are some things that spook them a little - the high profile decision to put the Guitar Hero franchise to bed, and the negative press it attracted, for example. The publisher's inability to control Blizzard's release schedule also makes revenue projections very difficult, although given that the studio's perfectionism is a core part of its ability to keep on laying golden eggs, it's unlikely that many investors would want to see that particular aspect changed. Overall, Activision's share price weathers storms very handsomely (even the 2008 financial crisis) and shows solid if unexciting growth, focused around holiday quarters.
So is Kotick really delivering what the markets want, as he cuts an abrasive swathe through the specialist gaming sector time and again? Perhaps - for a certain section of the investment community, at least. Solid, slow-burning stocks are always extremely popular, for obvious reasons. On the other hand, though, there's some indication that the markets share the concerns of gamers and other commentators (myself included) regarding Activision's future product strategy, and the likelihood that it will struggle to build new "pillars" to join products like CoD and WoW. EA and Take Two, by contrast, are actively trying to create huge new IPs and franchises, and far from running off to find safe harbour with the likes of ATVI stock, the markets are rewarding their risk-taking and their growth potential.
The Old Republic could give EA several million dedicated MMO subscribers, a whole new business bringing a fresh cashflow to the publisher.
The core question about Activision remains unanswered, then. Kotick's talent and ability to exploit and monetise an existing franchise is unquestionable, but his strategy for finding new franchises to build up into pillars of his business remains to be seen. The firm's deal with Bungie may yet bear abundant fruit, of course, but in the meantime, while Activision's expert franchise-milking may be yielding record-breaking sales year on year, it's clear that some corners of the investment world wouldn't object to a bit more risk and bit more opportunity in the company's future plans.