RealMoney Silver - Nintendo's Results Point to Success for Activision

Nintendo's Results Point to Success for Activision
By Michael Comeau
Breakout Stocks Portfolio Manager
4/24/2008 10:08 AM EDT

Early today, Nintendo (NTDOY) reported pretty solid fiscal third-quarter results, with revenue increasing by 73% and operating profit more than doubling as a result of the company's outstanding success with the Wii console and DS handheld. However, ongoing trends and Nintendo's results are actually telling us to buy other stocks in the industry, namely Activision (ATVI) .

The video-game industry is truly booming, as seen in market-research data and the blockbuster growth shown by names like Nintendo. But Nintendo has a big problem these days. It's not Microsoft (MSFT) , it's not Sony (SNE) , it's not the housing market, and it's not the rice shortage. It's the yen, whose appreciation vs. the dollar during the quarter took a hit on the bottom line, providing a negative offset to booming demand for Nintendo's products. The dollar has recently bounced against the yen, but at this point, the safe play is to avoid Nintendo until the dollar shows sustained strength.

First things first, the weak U.S. dollar is good for Activision, and boosted its revenues by $77 million during the first three quarters of its fiscal year. Technically, organic, business-driven gains in revenue and earnings are more valuable than those boosted by non-operating items like currency, but if you have to choose, you want those non-operating items in your favor. At the same time, the company has created sufficient product momentum this year to sustain the stock even if the U.S. dollar rallies.

There is some concern that the company's flagship Guitar Hero series faces extremely tough year-over-year comps due to its almost mind-boggling success in 2007. This is especially true for the June quarter, when the first Nintendo DS edition of Guitar Hero comps against Guitar Hero 2 for the Xbox 360 last year. However, Activision will also be releasing Guitar Hero: Aerosmith during June. While I don't think the game will be a monster hit, it will help pick up the slack, and the quarter's bottom-line results will undoubtedly be boosted by huge sales of a downloadable content package for its blockbuster Call of Duty 4 game.

Plus, the market for casual games like Guitar Hero continues to boom, and CEO Bobby Kotick recently revealed that the Guitar Hero series will soon integrate other instruments. This move is the perfect response to its main rival, Rock Band, and should keep Guitar Hero revenues on the upswing. We should also see price cuts from current levels for all the next-generation consoles this year, boosting the installed console game base, a big plus for a multiplatform monster like Guitar Hero.

And of course, we can't ignore what the company's merger with Vivendi Games brings to the table. World of Warcraft is not exactly a secret to anyone, but I'm a bit baffled at the lack of attention given to the other assets coming into the fold here. First up is Starcraft 2, a surefire multimillion-unit seller sequel to one of the biggest PC games of all time. In addition, there are potential megahits in the form of The Bourne Conspiracy, based upon the Bourne movie franchise; Ghostbusters; and perhaps most importantly, Prototype, which I view as the BioShock of 2008.

Valuation-wise, Activision's stock is very fairly valued at current levels, especially given that it trades at a discount to Electronic Arts (ERTS) , a company with significant challenges on the product portfolio side. As far as risks for Activision, I'm worried about the Tony Hawk skateboarding franchise given new competition in the category, as well as the almost absolute certainty that this year's Call of Duty 5 will fail to live up to the success of its predecessor. But after adding it all up, Activision's the video-game software company to bet on this year.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for TheStreet.com Breakout Stocks, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback; click here to send him an email.

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