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Activision Blizzard, Inc. (ATVI), Microsoft Corporation (MSFT): Make Video Gaming Stocks a Part of Your Portfolio

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Activision Blizzard, Inc. (NASDAQ:ATVI)Over the past five and a half years, Call of Duty has made shock waves and set new standards in the gaming industry. So it’s only reasonable to call Vivendi’s partnership with Activision Blizzard, Inc. (NASDAQ:ATVI) successful. Now that the company has bought back majority of its shares from Vivendi, the move represents a new dawn for the gaming industry and the shareholders of Activision Blizzard, Inc. (NASDAQ:ATVI). Furthermore, with the release of new gaming consoles by Microsoft Corporation (NASDAQ:MSFT)Sony Corporation (ADR) (NYSE:SNE) and Nintendo, the competition in providing the most entertaining game is fiercer than it has been for a long time.

Along with the management-led buyout, Activision Blizzard, Inc. (NASDAQ:ATVI) also announced that the company expects to outperform its initial earnings estimates by $0.03 a share. Activision Blizzard, Inc. (NASDAQ:ATVI) is considered to be one of the biggest game producers in the world, along with Ubisoft (NASDAQOTH:UBSFF) and Electronic Arts Inc. (NASDAQ:EA).

Thanks to sales of Skylanders Giants and Call of Duty Black Ops II, the game manufacturer has managed to have a significant hold on the market. The two leading games were released last fall but continued to sell accessories in the form of downloadable content for Call of Duty and toys for Giants until today. The company’s World of Warcraft franchise continuous to spin in a downwards spiral as it ended the quarter with 7.7 million subscribers, down from 8.3 million in the previous quarter.

The pipeline

For 2013 and 2014, the company is working on famous titles; some are extensions of its earlier games, while the company is also introducing new games to its product line. After the management-led buyback, the company can be expected to refocus its efforts in the North American market as is suggested by its move to rejoin the Entertainment Software Association (ESA).

Call of Duty: Ghost, Skylanders: Swap Force, Angry Birds Star Wars and Teenage Mutant Ninja Turtles: Out of the Shadows – these are the high-profile titles which will be launched in late 2013 and at the beginning of 2014. Keeping this in mind, the company’s Q3 and Q4 revenue and cash flow should be receiving a regular boost. Activision Blizzard, Inc. (NASDAQ:ATVI)’s EPS has been improving for the last four consecutive years and a similar hike is expected for 2013 as well. This is especially true since revenue and gross profit increased on a year-on-year basis. The positive cash flow and decrease in liabilities are also expected to continue in Q2.

Indicator Activision Blizzard Ubisoft Electronic Arts
Market Cap $17.0 bil $1.5 bil $7.5 bil
P/E TTM 13.9 17.7 79.4
Forward P/E 13.6 13.8 20.7
PEG Ratio 2.7 0.0 0.7
Operating Margin % TTM 30.5 7.0% 3.2%
Dividend Yield
, %
1.25%
Current Price $15.38 $15.70 $25.26

Valuations

Based on P/E values, Activision Blizzard, Inc. (NASDAQ:ATVI) and Ubisoft (NASDAQOTH:UBSFF) are undervalued, as the industry average P/E is 24.3. Looking ahead, Ubisoft is expected to make the most of its game releases for the remaining part of the year. Its forward P/E and PEG ratios are on par with Activision Blizzard. However, July has not been not pleasant for Ubisoft since its database was hacked and put users’ emails and passwords at a risk. On a brighter note, the company is coming out with some big names such as The Division, while having three new editions of Assassin’s Creeds in development for the upcoming year.

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