Some thoughts on Activision, Ubisoft, Take-Two and EA

[blubber]

By Blubber & Co

The stock price of Activision Blizzard had crashed almost 25% in the past months, making the stock look attractive – at first sight.
Estimated Price Earnings have come down to an interesting 13,8 (for the current year), whereas free cash flow return is up to more than 7%, which is a lot for the gaming industry.

But wait, there is of course a reason for this crash. Destiny should have become « the next big hit », but is in fact, « just another game ». It’s not too bad (sales-wise), but it is certainly not the succes everyone had hoped for. Bummer…

Activision’s big cash cow is of course World of Warcraft (WoW). But the number of subscribers is going down year after year. That’s why Activision had a « secret project », code name « Titan ». Titan was supposed to be « the next WoW ». But after 4 years, they decided Titan was « no fun » so they just threw it in the garbage can, along with $ 140 million. Bummer !! So far I am not hearing any good arguments to buy the dip…

But wait, it is not all drama at Activision. Call of Duty (CoD) is coming out this year and has sold millions and millions of copies each year, even at times when ratings at metacritic were very poor. Now there’s an interesting cash cow ! Moreover, Activision will also launch Warlords of Draenor (WoD) in 2014, the fifth expansion to World of Warcraft. Maybe that will increase the number of subscribers once again ?

If you think both WoD and CoD will be a stunning success, and Activision will continue to launch interesting new games, this might be a good time to invest.

But lets take a look at the other scenario, which I think is less likely but not impossible either. Suppose CoD is not a great success, but more importantly, suppose WoD is unable to stop the decline in the number of subscribers on WoW. As manager of Atvi, I’d be getting pretty nervous.
Destiny not the success I had hoped for, declining number of subscribers for WoW, the successor for WoW down the drain… No, this doesn’t look good at all !
And of course, it’s never a good idea to just « sit it out » until you have run out of options. While Activision is still a large company, I’d do the following – which is what a lot of managers would do. If you are unable to grow your business, why not BUY growth when you are still large and have plenty of cash ? I’d buy Take Two or Ubisoft. I think Ubisoft is the most interesting of the two, but I guess it is the less probable option (« it is French so it can’t be good, right ? »). So I guess they’ll prefer Take Two. No sir, a possible takeover of Take Two is not such a far fetched idea.
When this would happen (mind the « WHEN » and « WOULD »; it is just a possibility), I think it is unlikely that EA will just sit there and watch the sun go down. They’ll either launch a counter-offer (which would be great news for Take Two), or try to purchase Ubisoft I guess. The publisher that does not get to take over Take Two will probably shift its attention to Ubisoft. Unless of course, EA makes the first move. But the outcome would be the same.

Whether the upcoming WoD and CoD will be a stunning success or not, the coming months will certainly be very interesting. Mind that a possible failure of WoD and CoD (which for the record, I don’t really expect – but you never know), will possibly lead to a consolidation in the sector. But even before the consolidation takes place, Activision’s failure would be great news for Ubisoft, because less competition (WoD and especially CoD) equals more sales ! Or perhaps it’s just not all that bad, and the Activision share can initiate a sharp recovery over the coming months.

These were just some thoughts, certainly not an advice to buy or sell any stock. Now here’s a good idea : form your own opinion, you don’t have to follow other’s.

[Author]

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