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?
….And a Curse
The not-so-good news is that both new consoles are expected to retail for around $399, and gamers may not be so quick to upgrade. This is particularly true because of the length of the current console cycle. Current owners have more games, upgrades, and progress in their current games, and paying $399 to lose all of that isn’t going to be an easy pill to swallow. That being said, Microsoft Corporation (NASDAQ:MSFT) has about $67 billion in net cash and investments so spending money to advertise the advances the Xbox One offers won’t be an issue. It’s equally likely that Sony will put serious money behind getting the PS4 adoption rate moving as well.
If gamers decide not to upgrade en masse, Activision and its peers will have a challenge to develop games for the PS3 and Xbox 360, along with the PS4 and Xbox One. Developing for two systems is challenging enough. Developing for four (and don’t forget the Wii and Wii U) or more is another issue all together.
Not A Buy Yet
The good news for long-term Activision Blizzard, Inc. (NASDAQ:ATVI) investors is that the company’s core franchises — Call of Duty, Skylanders, World of Warcraft, Diablo, and Starcraft — are doing well. The bad news is, the biggest time of year for sales isn’t until nearer to the end of 2013. Call of Duty: Ghosts is due out at the beginning of November, and the two new consoles are due out sometime later this year. Activision should do well next year, as this year’s natural trough in earnings will be behind the company, and earnings comparisons should be easier. That said, at over 18 times earnings, it seems like investors think the end of this year is already here. It’s likely to be a tough summer and fall, because many other activities take away time that would otherwise be used for gaming. I would wait for a pullback in Activision shares before jumping in.
The article This Company Is a Buy (But Not Today) originally appeared on Fool.com and is written by Chad Henage.
Chad Henage owns shares of Microsoft. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard and Microsoft. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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