If these two giant franchises fade away it leaves Activision in a tough spot. There are some big releases on the horizon, such as Destiny from the studio responsible for the popular Halo series. Destiny is a persistent-world first person shooter where the universe of the game will be “alive”, always active and always changing. This is different enough from Call of Duty such that it likely won’t cannibalize sales. And given Halo’s popularity Destiny could very well be the next $1 billion franchise for Activision.
Better than the rest
Although there is plenty of uncertainty surrounding Activision, it is still more reasonably priced than other gaming companies. Revenue and profits are expected to decline in 2013 compared to 2012, and the company estimates GAAP EPS to be $0.77, excluding the effect of the buyout deal. This is down from $1.01 in 2012. The buyout should boost the EPS to around $1.20 per share, excluding new interest payments, based on the new share count. Accounting for the debt which will be created, Activision’s enterprise value is about 16.5 times expected earnings.
This isn’t all that cheap. Last time I wrote about Activision the stock was trading at far lower levels, and the big boost received due to news of the buyout deal has pushed the stock to levels higher than I’d like to pay, especially given the weakness in World of Warcraft and the new debt. The stock is up about 20% since my first article, but I think that it’s risen too high to consider any more.
Activision is, however, cheaper than its competition. Electronic Arts earned just $0.31 per share in fiscal 2013 ending in March after a steep revenue decline. Analysts expect earnings of $1.22 per share for the current year, but the forward P/E ratio of nearly 22 is far higher than that of Activision. This also assumes that Electronic Arts Inc. (NASDAQ:EA) can deliver these earnings, which may or may not be the case. Electronic Arts Inc. (NASDAQ:EA) does have Battlefield 4, its Call of Duty competitor, set to release this fall, as well as its popular slate of sports games, but it seems that high costs are eating away at the company’s bottom line. Electronic Arts Inc. (NASDAQ:EA) spends almost twice as much on R&D as Activision does, with revenue declines and poor profitability to show for it.
Take-Two Interactive Software, Inc. (NASDAQ:TTWO), publisher of the Grand Theft Auto series, has been losing money for the last two years. The upcoming release of GTA V will likely give the company a big boost, but with revenue essentially stagnant over the past decade there’s not much of a reason to own Take-Two at this point.
The bottom line
After rising 20% since my last article Activision isn’t nearly as attractive as it once was. The buyout deal adds significant debt, and the decline of World of Warcraft is leading to a lower level of profitability. Activision does have games such as the new Call of Duty in the pipeline, and the new console generation may provide a boost to sales, but it’s difficult to recommend Activision at these prices. At $15 per share, where the stock was when I wrote my first article, the picture looks a lot better. But $18 per share is too much to pay.
The article Uncertainty Surrounds This Game Company originally appeared on Fool.com and is written by Timothy Green.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
