Activision Blizzard (ATVI): 10 reasons to buy

"As a conservative long-term oriented investor I tend to keep individual position sizes to no more than 5% of the overall portfolio; however in the case of Activision Blizzard (NASDAQ: ATVI), I'm building a more concentrated position that I expect to pay off in the next two to three years," says Asif Suria.

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In his The SINLetter advisory, he offers 10 reasons why he believes the stock is an attractive core long-term investment.

"My goal is to eventually build this position until it represents 20% of my personal portfolio. Here are 10 reasons for making Activision Blizzard a core holding.

1. Activision released the highly anticipated game Call of Duty: Modern Warefare 2 and racked up $310 million in sales from the U.S. and United Kingdom over a 24 hour period. With Christmas right around the corner, the final sales numbers for this edition of Call of Duty are going to be much bigger.
   
2. World of Warcraft: Cataclysm for the MMORPG (Massively Multiplayer Online Role Playing Game) is expected to be released in 2010 to the 11.5 million active users who pay every month (or by the hour in China).
   
3. The Blizzard division of Activision that created World of Warcraft 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 of 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. 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.
   
10. 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,  a recent drop in video game software sales, longer console refreshment cycles and a general market decline.

"Despite these risks, my goal is to eventually build this position until it represents 20% of my personal portfolio."