Activision Blizzard (ATVI): 10 reasons to buy

2) World of Warcraft: Cataclysm for the MMORPG (Massively Multiplayer Online Role Playing Game) World of Warcraft (WOW) is expected to be released in 2010, bringing two new playable races to the 11.5 million active users who pay every month (or by the hour in China) to continue playing World of Warcraft.

3) The Blizzard division of Activision that created WOW also has another potential blockbuster game called Starcraft 2 scheduled for release in the first half of 2010. More than a decade after the release of the original Starcraft game millions of people are still playing it on Blizzard's online service called Battle.net.

4) Activision's line up of franchises like Guitar Hero and Call of Duty continue to perform well. According to Activision's CEO Bobby Kotick Guitar Hero was the year's #1 best-selling third-party franchise in North America and Europe through September 2009.

5) With the increase in mobile gaming both from regular devices like the Nintendo DS and smartphones like the iPhone, Activision gains additional distribution channels for its content. Shortly after the release of Call f Duty 2, the company release a pared down version of the game for the iPhone called Call of Duty: World at War: ZOMBIES.

6) Shifting gears beyond the product to what makes the stocks interesting, the company reported better than expected results when it reported third quarter results, gained 3.1% market share and ended the quarter with $2.7 billion in cash and investments and no debt.

7) The company repurchased $960 million to be precise as of 9/30/09 out of a $1.25 billion share repurchase program.

8) Activision reiterated its earnings target of 26 cents per share for full year 2009 on a GAAP basis. On a non-GAAP basis, earnings are expected to be 63 cents per share. The discrepancy between the two is primarily on account of deferred revenue related to online games like World of Warcraft. Activision has to spread out revenue from such games over the life of the subscription instead of when it actually makes the sale.

9) Using the non-GAAP revenue number of $4.5 billion and earnings of $0.63, we get a forward P/E of 18.55 and P/S of 3.3. Backing out the $2.7 billion in cash and investments from the $14.83 billion market cap, I arrive at an enterprise value of $12.13 billion and an EV/Sales ratio of 2.7. I have no qualms about paying under three times annual sales for a company that expects to post (non-GAAP) operating margins of over 25% for full year 2009.

1) A CEO who turned a $440,000 investment into the largest gaming company with a market cap approaching $15 billion over nearly two decades despite never having picked up a joystick.

"Sure there are risks to buying Activision just like there are with any investment. My biggest worries are huge recent insider sales especially by Activision's CEO Bobby Kotick, Blizzard's notorious reputation for not shipping a game 'until it is ready', a recent drop in video game software sales, and longer console refreshment cycles.

"I am also concerned about a general market decline after a powerful rally from the March lows. Despite these risks, my goal is to eventually build this position until it represents 20% of my personal portfolio."

Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.