Activision – Best In Gaming
The gaming industry has gone through fascinating growth over the last 20 years. When I got a Nintendo as a Christmas present in 1987 it was the coolest, most advanced gaming system ever. And the track pad made it even more incredible.
Today, the characters are more realistic (I caught myself doing a double take at Best Buy last week when I thought an NBA video game was a live game), programming is more complex and gaming systems fight to grab our attention. To analyze the industry we have to take a look at where it is going…
Industry Future:
- Like most media the gaming industry is likely to move to a download business model. Possibly operated on remote servers that can be accessed anywhere in the world. This makes me think the retail gaming market, dominated by Gamestop (GME) and big box retailers like Best Buy is an area I want to stay away from. They’ll be innovated out of the market.
- As of today consoles are the brain power of the gaming market. But even though they’re the brain they’re often sold at a loss by manufacturers Microsoft and Sony. Threats from “cloud” gaming could reduce our dependence on the console itself, rendering manufacturers even more helpless. It’s not likely they will be replaced all together any time soon but it is likely their power in the industry will remain low.
- This leaves us the middle man in the market. The content provider. And without them there is no game. They can develop their games for multiple consoles and sell them in any retail outlet including download form. They have by far the most power in the industry. So the key is to create content that gamers will demand. The more demand the higher margins go.
This is why Activision is the best in the gaming market. They simply have the best content. And they’re innovating around existing content. The recently released DJ Hero (which I’ve been addicted to the last few days) proves they can still innovate. Established franchises such as Starcraft, Call of Duty and World of Warcraft provide an extremely solid base for future growth. The challenge is creating the next great franchise. Something a formerly dominant Electronic Arts (ERTS) has failed to do. I think the diverse product base will help ATVI from following the same path.
Their forward P/E of 14.5 is reasonable although I would like to see a better value. If holiday sales fall short of projections it could be a great entry point under $10. But today’s close of $11.28 isn’t a terrible price.
Disclosure: The Author does not own ATVI, GME, ERTS or BBY.