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Daniel Loeb’s Company of Choice in the Gaming Industry

November 21, 2013 | About:
Patricio Kehoe

Patricio Kehoe

7 followers
The gaming industry is known for its volatility and fierce competition: a major hit can launch a company to success, while a fluke could mean its demise. In such an environment, savvy investments can be made, and profits harnessed from growing companies. When Daniel Loeb became active in this industry, I was keen on finding out more about his investments in firms such as Activision Blizzard (ATVI) and Electronic Arts (EA).

A Highly Specialized Game Developer [/b]Activision Blizzard is the largest video game publisher in the world, with renowned titles such as “World of Warcraft” and “Call of Duty.” The firm not only boasts an impressive portfolio, but is globally active, despite the fact that around 90% of its sales stem from North America and Europe.

As game publishers attempt to engage users, and retain them for long periods of time, the power of social networks has turned into an important tool. Activision Blizzard has followed this trend closely, recognizing the potential window for monetization through downloadable content. As users enjoy collaboration in online multiplayer games, the firm has created incentives for players so that they continue playing the same game. Since users don’t want to leave a network of friends, Activision Blizzard provides new content so that customers don’t get bored, and can continue enjoying gameplay with their social network. The famous games World of Warcraft and Call of Duty fit perfectly into this scheme, which has allowed the company to create a multi-billion dollar franchise.

As the firm intends to continue pushing this model forward, Destiny, an upcoming first-person shooter video game, is bound to harness similar success. Yet in this changing industry, relying on a single strategy to improve sales is not always wise. Hence, Activision Blizzard is taking its first steps into the mobile publishing business. By publishing third-party mobile games, the company expects to keep competing with rivals [b]Take-Two Interactive (TTWO)
and Electronic Arts.

Activision Blizzard’s success has been noted by many, including investment guru Daniel Loeb, who recently bought into the firm with an acquisition of 2.6 million shares. And, while trading at 16.2 times its trailing earnings, the time for entry seems just right, as the stock is available at a 30.4% price discount relative to the industry average. Activision Blizzard is on a clear growth path, with share prices rising steadily and all metrics looking great, thus making me feel bullish regarding this stock

A Premium-Priced, Multi-Platform Giant [/b]As the second-largest video game publisher, EA has developed a strong portfolio which includes renowned titles such as the Madden NFL series, FIFA series, The Sims and Battlefield. In addition to console titles, the firm develops games for computers, mobile devices and online platforms. By obtaining a significant presence on all platforms, EA is truly one of a kind.

The company’s success over the past years was impressive and looking forward, major releases are expected to continue driving revenue upwards. Especially the sports genre has been profitable for the firm, as it accounted for approximately 50% of all sports game sales. This has led EA to drop some of its lesser titles, in order to focus on major franchises, such as FIFA and Battlefield.

EA is looking to inject new life into their major franchises, while expanding on several platforms. This multi-pronged growth strategy could pay off, yet the firm is also bound to be spread across too many different projects. Publishing too many games on different platforms could lead EA to lose sight of what really matters, such as adequate support and upgrades.

As this video game publisher seeks to expand, particularly into the mobile gaming industry, which offers high-margin sales, competition is bound to be tough. The company already faces strong rivals in the console gaming segment, with [b]Nintendo (NTDOY)
, Sony (SNE) and Microsoft (MSFT) outranking EA in terms of resources and institutional advantage.

Despite having a proven track record and good prospects for its major franchises, the stock is too expensive to make for a good investment. EA is trading at 32.7 times its trailing earnings, meaning investors must pay a whopping 40% price premium relative to industry peers’ average. Hence, it comes as little surprise that Daniel Loeb decided to sell out of this firm, as did Leon Cooperman. The time to buy in cheap has passed, and with competition getting stiffer, I feel quite bearish regarding this stock’s potential as a long-term investment.

Daniel Loeb’s Choice

Although investment gurus such as Daniel Loeb can be mistaken, I tend to follow their moves quite closely. And, when it comes to the gaming industry, Loeb seems to be on track. He sold out of Electronic Arts after making a great profit, and has put his money into Activision Blizzard at a time when growth is expected and entry is cheap. Due to its growth prospects, major franchises and currently undervalued stock price, I also feel Activision Blizzard is a savvy investment.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 5.0/5 (3 votes)

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