Is Activision Blizzard, Inc. (ATVI) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Activision Blizzard, Inc. (NASDAQ:ATVI) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Activision Blizzard, Inc. (NASDAQ:ATVI)’s story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Activision Blizzard, Inc. (NASDAQ:ATVI)’s key statistics:

ATVI Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	8.7%	Fail
Improving profit margin	268.2%	Pass
Free cash flow growth > Net income growth	41.9% vs. 300.3%	Fail
Improving EPS	348.6%	Pass
Stock growth (+ 15%) < EPS growth	31.1% vs. 348.6%	Pass

Source: YCharts.
*Period begins at end of Q1 2010.

ATVI Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	308.4%	Pass
Declining debt to equity	No debt	Pass
Dividend growth > 25%	15.2%	Fail
Free cash flow payout ratio < 50%	14.2%	Pass

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we’re going
Activision Blizzard, Inc. (NASDAQ:ATVI) slays six out of nine of our tests today, but those three bosses could fall in the future. One of its falling grades only happened because net income has far outpaced free cash flow during our tracked period — however, the company’s trailing 12-month free cash flow is actually higher than its net income. Activision Blizzard, Inc. (NASDAQ:ATVI)’s shares have made an impressive comeback this year, and have finally reclaimed the multi-year highs left behind early in 2008. This is a strong performance, but can Activision keep up the progress? Let’s dig a little deeper to find out.

Activision’s success largely depends on its ability to consistently land new games on top-seller lists. New games for its top four franchises — Call of Duty, World of Warcraft, Skylanders and the Diablo/StarCraft duo (the two are released infrequently enough to count more as one annual-esque franchise for the games titan) — produce the vast majority of Activision’s earnings. The one-two punch of Skylanders: Spyro’s Adventure and Skylanders Giants earned Activision sales in excess of $1 billion sales for 15 months. Its Starcraft II expansion pack Heart of the Swarm also racked up an incredible 11.1 million copies sold in only two days after release.