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Activision Blizzard, Inc. (ATVI): This Company Is a Buy (But Not Today)

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Activision Blizzard, Inc. (NASDAQ:ATVI)I don’t know how any logical thinker could suggest that  Activision Blizzard, Inc. (NASDAQ:ATVI) is anything other than the class of its industry. The company’s games rank in the top 10 among multiple formats, and in North America and Europe, they had the No. 1- and No. 2-selling games in the first quarter. That said, investors seem to be struck with euphoria that probably isn’t warranted — at least until later this year.

High Expectations in a Challenging Environment

There’s no question that Activision Blizzard, Inc. (NASDAQ:ATVI) is doing many things right. However, the stock is near a 52-week high, and the relative value of the shares is worse than before. Today, Activision Blizzard, Inc. (NASDAQ:ATVI) sells for over 18 times its 2013 full-year earnings estimates, and pays a yield of 1.22%.

Just a few months ago, the stock was closer to $12 than $15, and carried a P/E of about 14. In addition, a few months ago, the average analysts was calling for roughly 10% EPS growth over the next few years, today that number has been lowered to 7.65%.

If you look at Activision’s peers, the competition is a very mixed bag of valuations. On the one hand, investors could choose Electronic Arts Inc. (NASDAQ:EA) and pay about the same forward P/E. But analysts expect almost twice the EPS growth from Electronic Arts Inc. (NASDAQ:EA), at 15.18%.

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is best valued on its 2014 estimates, since it expects a significant drop in earnings between this year and next. On 2014 estimates, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is valued at less than 15 times earnings, but is expected to grow EPS by nearly 11%.

The point is, Activision Blizzard, Inc. (NASDAQ:ATVI) shareholders obviously have high hopes for growth in the future. But analysts just don’t share the same optimism.

New Consoles Are Both a Blessing….

Considering that Activision Blizzard, Inc. (NASDAQ:ATVI) gets almost 75% of its revenue from product sales, the idea of the new Microsoft Corporation (NASDAQ:MSFT) Xbox One and Sony PlayStation 4 consoles should be good news. Initially, new consoles are a challenge because they hurt the profitability of older generation games. However, long-term new consoles bring interest back to gaming, and the Xbox One and PS4 are no exception.

Since EA gets 70% of its revenue from products, and Take-Two gets 80% of its sales from console games, they are in the same boat as Activision. The good news is, both consoles run very similar hardware, so it should be easier for developers to create games for the two new systems without worrying about completely different architecture. In addition, new consoles usually mean new titles for those consoles, and new software usually sells for a higher price than older games.

In addition, Microsoft Corporation (NASDAQ:MSFT) is trying to make it more difficult for users to just trade games instead of buying them. The company has confirmed that once a game is loaded onto the Xbox One, it will be “locked” to that Xbox Live ID. In order to play that same game on another system, the user will have to pay a fee.

If this console takes off, it would be a huge win for Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts Inc. (NASDAQ:EA), and Take-Two Interactive Software, Inc. (NASDAQ:TTWO), as gamers would be less likely to pay fees to play used games, and more likely to just buy them new. This policy also should increase the level of digital sales. If you have to pay a fee to play a used game anyway, what’s the point of buying the disc?

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