Revisit Activision (ATVI). ATVI may be a Buy here.

After revisiting Activision (ATVI) right now, ATVI looks like a Buy:

1. Even before Vivendi bought a majority stake of ATVI around Dec. 20, Activision's "Guitar Hero" and "Call of Duty" continue to outperform.
   
2. Recently, (Dec. 20, 2007), company revised outlook upwards.
   
3. The Blizzard/Activision combination is great, and Blizzard does have a great reputation in online gaming, and online gaming, especially MMORPGs (Massively MultiPlayer Online Role Playing Games) and online gaming in the rest of the world especially East Asia is a big growth area.
   
4. The free model (with players paying money for items in the game) of Shanda Interactive (SNDA) seems to be working well. And we'll see what kind of business models will be used by Electronic Arts (ERTS) and Activision (ATVI)
   
5. Forward PE of ERTS and ATVI are both around 30.
   
6. ATVI has broken out out of a flat base, and is breaking out to new highs, with a forward PE of only 30 with a growth rate of about 23 for a reasonable PEG of 1.30.
   

ATVI/Blizzard looks like a good buy and could be poised for greatness over the next few years if they execute on their growth plan.


JC Comments about Activision (ATVI)

The above post was inspired after poster "JC" had these comments:

"Personally, I'd add Activision (ATVI) to the list of videogame stocks to watch out for.

Vivendi Universal (the company that owns Blizzard/World of Warcraft) and Activision are merging, and when you look at their combined game portfolio, I sincerely believe that they represent a much healthier combination of games than Electronic Arts.

Electronic Arts has so much money tied into console gaming (which is still in a transitionary cycle to the next-gen consoles), and the jury is still out whether their investment into Mythic's Warhammer Online is even going to pay out.

EA has such a piss-poor history with online gaming, that I'm not confident at all that they're going to be able to make as much growth as Activision/Vivendi.

I mean, looking forward, Blizzard accidentally let it slip out that they are working on a new MMORPG outside of the Warcraft space (which is huge, and speculation that it will be based either on Starcraft or Diablo). I think with Blizzard's reputation, that an MMO with either of those two properties will be huge! (in Asia as well as North America).

Looking at EA..., all they have in the online pipeline (that I know of) is Warhammer Online. While I realize that there are many Warhammer lead minature game stores across the company, I'm not entirely convinced that Warhammer translates well into a MMORPG, or that enough of those tabletop board gamers who are fans of the game will pick up a subscription based game for something that they do for free...IMO, the attraction of Warhammer is the purchase, creation and painting of an army, and then playing that army against real-life friends. ....so I just don't see those people ditching their nerdy social circle (which is totally fine for them, don't get me wrong) to interact with a bunch of anonymous 12 year olds screaming "Sparta!!!" and "Chuck Norris rulez!" in global broadcast chat in an online game..."

- JC

(Computer and Video) Gaming is still Strong

There's a Bull Market in Gaming. Three Major consoles are out such the famous Nintendo Wii, Sony PS3, and Microsoft Xbox.

There's also a strong growth area in online gaming (such as the networked version of World of Warcraft) especially in East Asia and China.

Some nominees

1. GME (Gamestop): Why do you have to choose the winner between the console makers and the software makers? Their merger with Electronic Boutique, another gaming retailer is going very well.
   
2. ERTS (Electronic Arts): Software Maker
   
3. NVDA (Nvidia): They make graphic chips and other products used by computer gamers.
   
4. SNDA (Shanda Interactive): Chinese online Gaming company.
   
5. NCTY (The9 Limited): Chinese online Gaming company. They have rights to offer World of Warcraft in China.
   
6. GA (Giant Interactive): Chinese Online Gaming company. Recent IPO. Speculative play.
   

My favorites (in this order), are:

1. GME
   
2. SNDA
   

The Chinese Online Gaming Boom

There's a boom in the video and computer gaming market. Gamestop (GME) the game retailer, has seen its stock soar thanks to the current video game cycle. Recently, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.pk) have released major next generation gaming consoles (Microsoft Xbox 360, Sony Playstation 3, and Nintendo Wii). Gaming software manufacturers such as Electronic Arts (ERTS) and Activision (ATVI) also benefit from this cycle. Even companies like Nvidia Corporation (NVDA), which offer programmable graphic processor technologies needed by game players, benefit.

However, the most intriguing and high growth area of this industry is the growth in online gaming, especially in China.

Online Gaming revenue in China, according to Wu Shulin, deputy Director of China's General Administration of Press and Publication (GAPP), was $1.04 Billion at the end of 2006, and is expected to grow to $3.9 Billion by 2010. The Chinese economy is booming, the middle class is growing, and internet access, especially through internet cafes is growing, trends that are helping the gaming boom in China.

According to the US based market research company International Data Corporation (IDC), there are an estimated 31 million people playing games online in China. Many people, especially those between the ages of 18 and 30, can be seen in packed internet cafes playing online games till the early hours.

There are three main Chinese companies that can benefit from this trend:

1. The9 Limited (NCTY) is a $1.3 Billion Chinese company, with a forward PE of 17.5, a five year estimated growth rate of 25%, for a Price Earnings to Growth Rate (PEG) of 0.7, very cheap (less than 1 is cheap). The company has virtually no debt.

The Company primarily engages in the development of massively multiplayer online role playing games (MMORPGs) for Chinese online game players.

The9 also has the rights to bring Western games such as Blizzard Entertainment's very popular World of Warcraft Multiplayer Online Role Playing game to China. World of Warcraft in the West is part of Pop Culture as evidenced by being prominently featured in Comedy Central's (VIA.B) "South Park" show in an Emmy nominated episode about World of Warcraft. World of Warcraft is the most popular western MMORPG in Asia and the third most popular in China with peak concurrent users numbering 688,000 and revenues of $36.1 million in late 2006.

The9 also implemented a pay-for-time system in the game, differing from the monthly subscription method in other territories.

Electronic Arts (ERTS), the US electronic software producer, will own 15% of The9. As part of the deal, The9 will gain exclusive publishing rights for EA Sports FIFA Online.

2. Shanda Interactive (SNDA) is a $2 Billion Chinese company with a forward PE of 16.84, a five year estimated growth rate of 26.9% for a PEG of 0.62, again, very cheap (PEG less than 1.0 is cheap).

Shanda Interactive engages in development and operation of online games in China including Massively Multiplayer Online Role Playing Games and Online Casual Games such as chess. Shanda maintains a large number of popular games produced by Western, Chinese, and Korean companies, with the Chinese and Korean games being the most popular.

In a recent China online gaming survey conducted by Piper Jaffray, 55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within games. Shanda also tied with competitor The9 as the company in its market that offers the best games.

3. NetEase (NTES) is a $2.04 Billion Chinese company with a forward PE of 13, a five year estimated growth rate of 15% for a PEG of 0.86. the company has a low Total Debt to Equity Ratio of only 0.217.

The company has an online games business that focuses on massively multiplayer online role playing games by selling prepaid point cards to the end user. These cards could be distributed through wholesalers, internet cafes, supermarkets and other venues.

Netease manages Fantasy Westward Journey, the most popular online game in China in terms of Peak Concurrent Users.

The company also has a wide array of internet services outside of its online games business.


Online gaming in China has a bright future. Electronic Arts (ERTS) 15% stake in Chinese online Gaming Company The9 is evidence that US companies believe in the great growth in the Chinese Online Gaming Market. Why not follow Electronic Arts lead and invest in the growth area of the gaming industry: Chinese Online Gaming.