Activision Blizzard (NASDAQ: ATVI), a video-game publisher that competes with Electronic Arts (NASDAQ: ERTS), THQ (NASDAQ: THQI), and Take-Two Interactive (NASDAQ: TTWO), reported earnings for the fourth quarter on Wednesday after the bell. The company did well during the holiday-selling season, in my opinion. According to this source, adjusted quarterly earnings of 31 cents per share beat estimates by two pennies. Non-GAAP sales of $2.3 billion also beat analyst expectations.
However, the market decided to sell the stock in the after-hours session after the earnings were released because of what was perceived to be a poor outlook for the next fiscal year (as I was writing this piece, the shares were off by about 4%). Analysts were hoping that 2009 would bring 67 cents per share on an adjusted basis, but Activision Blizzard's management team thinks 61 cents per share is more likely.
You know, I actually think there is a positive angle here. Considering that analysts at this point are disappointed on the guidance, I believe there may be ample room for Activision Blizzard to beat estimates in coming months. It all depends on how strongly the video-gaming consumer reacts to the publisher's new games. The release spoke about a new Guitar Hero title based on the works of Metallica. I imagine that will sell well, although I will admit that, as time progresses, I have to wonder how long the Guitar Hero juggernaut can continue (maybe DJ Hero will pick up the slack when the fad eventually starts to fade). There will also be a new title based on Hasbro's (NYSE: HAS) Transformers property, as well as a game sourced from DreamWorks Animation's (NYSE: DWA) upcoming Monsters vs. Aliens.
The company should see continued strength with its World of Warcraft franchise. I've been taken to task in the past for minimizing the Warcraft angle to the Activision Blizzard story. Point well taken. Management also highlighted an acquisition made during the quarter to bolster its efforts to develop quality titles for the Nintendo (OTC: NTDOY) Wii. Competing for attention on the Wii platform is indeed difficult, considering that a lot of gamers who own that system tend to mostly buy software from Nintendo. There is more work to be done in terms of developing a comprehensive Wii strategy.
Activision Blizzard's stock has been weak. It's still stuck below $10 per share, at least at the time of this writing. While I think the stock will continue to have a tough time gaining traction in this market, as a long-term play on the current console cycle, I think it's worth a look. Remember that Sony (NYSE: SNE) and Microsoft (NASDAQ: MSFT) will eventually cut prices on their respective systems, the PlayStation 3 and the Xbox 360. I don't know when that will happen, could be a very long time from now, but it eventually will happen. So I think there is a nice long-term thesis on a strong publisher like Activision Blizzard as the base of installed users continues to increase. And keep in mind that demand for the Wii continues to be healthy.
For now, holders of the stock (such as myself) will have to remain patient. Hopefully the Easter-selling season will be kind to Activision Blizzard's software portfolio. Easter is getting to be like a second Christmas, so there's an opportunity here. Of course, no one has any pricing power these days, so there may be a lot of discounting going on to keep discs moving off the shelves. Let's hope management can get the consumer to pay as close to top dollar as possible for Activision Blizzard's games.
Disclosure: I own Activision Blizzard, Microsoft; positions can change without notice.
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