Video games may be rotting our brains, but with Activision Blizzard, Inc. (NASDAQ:ATVI)’s growth in both net income and revenue from 2011 to 2012, it doesn’t look like they’re rotting anyone’s wallet. The boost in profits led to a nice jump in the company’s stock price; a jump that caught the eye of…well, almost everyone with eyes.
1). Its valuation relative to similar companies.
2). What other investors are saying.
3). What risks the company faces.
Comparison
Creating a valuation of a potential stock may seem mystifying. However, determining value is something us average folk do on a daily basis. It’s the reason the last pair of jeans I bought were Wrangler and not True Religion. And no, it’s not because I secretly hope to play pick-up football with Brett Favre. Rather, I’m not much of a fashionista, so I realized I’d get the same amount of use for a lower price—ergo a better value. And at the core of it, that’s what investing is all about — finding price/value disparities. There’s a price for a stock and there’s the value of the company it represents. When those two are out of alignment, it can create an opportunity for eagle-eyed investors.
One way to spot these opportunities is by comparing similar companies’ price to earnings ratios (aka P/E). That gives us an idea of just how much investors are will to pay per dollar in return.
| Company | Price | P/E | EPS |
| Activision Blizzard (NASDAQ:ATVI) | 14.63 | 14.45 | 1.01 |
| Take-Two Interactive Software, Inc (NASDAQ:TTWO) | 15.52 | N/M | -1.51 |
| Electronic Arts Inc. (NASDAQ:EA) | 17.58 | 36.70 | 0.48 |
| Microsoft Corporation (NASDAQ:MSFT) | 28.05 | 15.38 | 1.82 |
Electronic Arts Inc. (NASDAQ:EA)
If you could pay $14 per share to get a dollar in return, why in the world would you pay $36? Well, why do people bet the pony with 100/1 odds, or ride roller coasters? For the thrill! So, if you feel like getting a little risky, try betting on a company like Electronic Arts. The company has struggled in recent years, but there are high hopes that white-hot growth will put EA back “in the game.” The way the industry evolves it may take a company a few years to get its feet back under them. But with significant growth in Electronic Arts’ mobile and online revenues, there’s still a good shot EA can make that comeback. Though, even with a potential comeback, I’d be hard pressed to believe EA could surpass Activision.
Microsoft Corporation (NASDAQ:MSFT)
However, if sitting on your couch and watching Downton Abbey is your idea of an exciting night, maybe Microsoft is more your speed. Microsoft is a giant of a company—about 14 times the size of Activision– and while they may not knock it out of the park when it comes to growth, Microsoft has increased its profit margins every year for the past three. And I expect that trend to continue with the arrival of the Xbox 720. It has been eight years since the last big video game console launch and rumors have been running rampant about possible specs for the newest systems. This may be just the spark needed to relight the fire under the video game industry; investors should prepare themselves for a nice spike in profits this coming Christmas.
Toe to toe, Microsoft is safer then Activision Blizzard. Microsoft has a stronger reach, which means that if the video game industry crashes and burns, Microsoft will be just fine.
