Activision Blizzard (NASDAQ:ATVI) Call of Duty franchise is a $2 billion video-game behemoth. It has produced three of the highest-selling titles to date that combined have sold 33.5 million copies worldwide.
And Activision’s product development operation is a predictable money machine — producing a new game for the franchise each November. And with each new installment in the series has come ever-greater sales. Activision’s projected release of Modern Warfare 3 in November could keep thisuptrend going.
Through Activision’s merger with Blizzard Entertainment in July 2008, it added World of Warcraft, the industry’s highest-grossing computer game. World of Warcraft has more than 11 million subscribers worldwide — each of whom pay $15 a month in subscription fees in addition to costs to buy the game and expansions.
Activision has not only done a great job of introducing successful new products, its most recent quarterly earnings were impressive. In the first quarter, Activision’s profit beat Wall Street’s expectations and revenue rose 5.7% to $755 million – beating estimates by 13% and management guidance by 18%.
Activision also raised its 2011 profit outlook. Its new EPS estimate of 73 cents is nine cents more than the consensus, but its revenue forecast of $3.95 billion was $40 million below analysts’ expectations.
Do the potential from Call of Duty and Activision’s recent surpassing of expectations make it a good choice for your portfolio? To think about that, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
With a PEG of 0.83 Activision looks undervalued. Activision trades at a P/E of 25.7 with earnings expected to grow to 89 cents a share in 2012.
Since it has been consistently beating quarterly expectations, delivering one Call of Duty game a year, and introducing a new revenue stream through Elite, Activision could continue to deliver upside surprises.
Investors who are not playing games with their portfolios might consider buying Activision stock at this price.
Peter Cohan has no financial interest in the securities mentioned.