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Is Activision Blizzard, Inc. (ATVI) a Buy?

Activision Blizzard looks like a steal, even after the big run up in the share price earlier this year.

The competition

Activision Blizzard stands out from other game companies like Electronic Arts Inc. (NASDAQ:EA) and Take-Two Interactive Software, Inc. (NASDAQ:TTWO) due to its extremely high margins. Let’s look at a comparison for fiscal 2012:

Company Gross margin Operating margin Net income margin FCF margin
Activision Blizzard 65.8% 29.9% 23.7% 26.2%
Electronic Arts 63.4% 3.2% 2.6% 5.7%
Take-Two 41.1% 0.4% -2.4% -1.8%

Activision Blizzard turns 26.2% of its revenue into free cash flow, while EA is almost a factor of 5 worse and Take-Two isn’t profitable at all. EA clearly has a problem keeping its costs under control, something that Activision Blizzard has excelled at.

From a valuation perspective Activision Blizzard comes out on top as well. EA trades at about 32 times FCF compared to Activision Blizzard’s 13, and that’s not even taking into account the net cash. Take-Two, being unprofitable, doesn’t have a comparable ratio. I see no reason for EA to be trading at such a high multiple, especially given that Activision Blizzard is a far superior company.

The bottom line

Activision Blizzard is a money-machine, with extremely high margins and a stable of ultra-popular games. The stock is significantly undervalued and trades at much lower multiples than its less-profitable peers. With the stock market hitting new highs every day it’s getting harder and harder to find value, but Activision Blizzard looks like a bargain.

Activision Blizzard Q1 report

The article A Game Company Worth Buying originally appeared on and is written by Timothy Green.

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