Advanced Search

BW 50 Home
The Best Performers
Investing for Growth
The Tech Outlook

2001 BW 50



Activision: Plenty of Thrills and Spills
Like the video games the company publishes, this stock can make extreme moves -- but in the end, investors should enjoy it

Printer-Friendly Version
E-Mail This Story

Bobby Kotick, 38, isn't all that big on thrill-seeking. So why did he become CEO of Activision (ATVI )? The video-game publisher (No. 3 among this year's best-performing companies on Standard & Poor's Mid Cap 400 index) specializes in extreme-sports games such as skateboarding, snowboarding, surfing, and even wakeboarding, in which water-skiers pull daredevil stunts as they fly over ramps in the water. The answer is simple: "I'm a businessman," he says. "When I got involved in this business, there was only one serious company [Electronic Arts]. I knew it was a rapidly growing market. I knew there was room for another."

Kotick was right on both counts. The video-game industry is indeed big business. Despite the slow economy, the market for video-game hardware, software, and accessories rose 43% in 2001, to a record $9.4 billion, according to market research firm NPD. Compare that with Hollywood box-office receipts, which totaled $8.35 billion (see BW Online Special Report, 12/13/01, "The Game Boom").

Activision has ridden video games' wave of popularity as professionally as its extreme-sport hero, surfer Kelly Slater. On Jan. 24, management raised financial guidance for the second quarter in a row. It says revenues for fiscal year 2002 will come in at $765 million, $40 million more than the previous estimate and 23% ahead of 2001's $620 million. In fiscal 2003, revenues are expected to reach $845 million. Only Electronic Arts (ERTS ) is bigger: It posted revenues of $1.3 billion in 2001.

JUMP AND CRASH.  Naturally, investors want a piece of the action. But like video-game players, they should prepare themselves for the thrills and spills associated with the sector's stocks, which respond to weekly video-game sales figures and are relatively thinly traded. Shares of Activision and its rivals can jump and crash 20% in any given week.

Since Activision's upbeat earnings report on Jan. 23, the stock has moved from $24 to $32 and back to around $28 -- still well shy of the consensus 12-month target of $35. "You need to use that volatility to your advantage and exploit it. Video-game stocks are not for the faint of heart," says Edward Williams, an analyst with Gerard Klauer Mattison & Co.

Kotick would like to change that by making his business more predictable. To that end, he has put market research on equal footing with creativity for the selection and development of game titles. Almost every Activision studio now has its own dedicated focus-group facilities, where game developers can watch through two-way mirrors as groups of 10-year-olds take on the latest Tony Hawk Pro Skater game. And financial bonuses are tied to game sales, so developers, not just the sales team, benefit if they produce a best-seller.

FRANCHISES.  Equally important is betting on video-game franchises with proven track records. To date, extreme-sports titles have been Activision's lifeblood. Tony Hawk Pro Skater alone has grossed $425 million in its three years on the market. The company also has seen reliable sales from games based on the Marvel Comics characters X-Men and Spiderman, and from Star Wars.

On Mar. 15, Activision released the latest version of Tony Hawk for Microsoft's Xbox and Nintendo's Gamecube console. Tony Hawk 4 and a preliminary version of Tony Hawk 5 are already in the works, as are almost 30 other extreme-sports titles including Mat Hoffman Pro BMX 2 and a new addition of the Kelly Slater Pro Surfer series.

On May 3, moreover, Activision will simultaneously release a new Spiderman game on five game consoles, including Xbox, Gamecube, and PlayStation2, to mark the launch of a Hollywood film starring Tobey McGuire. "We build a product slate and revenue base that's largely composed of products and properties that have historical success in the video-game business. That gives us very good visibility on the future where others do not," says Kotick.

A MARKET ON FIRE.  Such discipline has reaped stellar returns. Activision's compound annual growth rate for earnings per share is 45% -- twice that of the market's. In fiscal 2002, earnings per share will reach 82 cents -- a 64% rise over the prior year's 49 cents. Operating margins, once a concern, also are growing. They were 6.4% in 2001, and William Blair & Co analyst David Farina expects them to reach 9.7% this year.

Next year could be Activision's biggest yet. The launch of the two new gaming platforms, Xbox and Gamecube, at the end of 2001 has ignited the market. By the end of the holiday season, there were 1.4 million Xbox and 1.3 million GameCube consoles in the U.S. By the end of 2002, analysts expect the combined total to reach 5 million. PlayStation2, the market leader, has a base of 7.4 million consoles. That platform is selling at twice the rate of its predecessor, PlayStation 1. "In an area where it's challenging to find growth, this is an easy place to find it," says analyst Williams.

Still, some worry that, unlike the more diversified Electronic Arts, Activision is too dependent on hit titles, especially Tony Hawk Pro Skater. According to Kotick, some 30% of revenues for fiscal 2002 came from sales of Tony Hawk. That will dip slightly in 2003, to 27%.

"LOSING ZERO SLEEP."  On Mar. 15, U.S. Bancorp Piper Jaffray analyst Michael Gikas downgraded Activision's shares on fears that its portfolio isn't sufficiently diversified. "How long will Tony Hawk continue to be popular?" wonders UBS Warburg analyst Michael Wallace. "The key question is whether new extreme-sports or comic-book spin-offs can offset the significance of Tony Hawk."

The good news is, Activision isn't counting on another Tony Hawk blockbuster to reach its sales forecasts. This year, it'll introduce 65 games, a 36% increase over the 42 released in the prior fiscal year. Kotick says 80% of expected revenues will come from predictable franchises.

And a surprise hit, such as the 1 million-selling PC fantasy game Return to Castle Wolfenstein, could boost revenues further.

"I'm losing zero sleep over this company," says Blair analyst Farina. Kotick seems to be well on his way toward achieving his goal: making video games predictable. That would be a big score for Activision investors.

Editor's Note: Since this story was originally published on Mar. 25, Activision stock has held steady around $29 -- despite better-than-expected profits and new, aggressive earnings guidance for 2003. On May 7, it screamed past its fourth-quarter estimates, reporting earnings of $10.9 million, or 17 cents a share, compared with the year-ago total of $875,000, or 2 cents a share. Analysts polled by First Call expected earnings per share of 11 cents. On June 7, Activision issued new earnings guidance for 2003. It now expects profits of $1.10 a share, on revenues of $890 million. Wall Street's consensus earnings estimate is now $1.11 a share, according to First Call.

MARCH 25, 2002

By Jane Black

Edited by Beth Belton

Get BusinessWeek directly on your desktop with our RSS feeds.XML

Add BusinessWeek news to your Web site with our headline feed.

Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.

To subscribe online to BusinessWeek magazine, please click here.

Learn more, go to the BusinessWeekOnline home page

Back to Top

[an error occurred while processing this directive]