Activision Blizzard (ATVI - Get Report) is playing its way to big profits in 2013 -- and its share price is already reflecting an upswing in momentum. Activision Blizzard owns some of the hottest video game franchises in the world, including Call of Duty, World of Warcraft and Diablo. The firm also boasts a huge cash position, with more than $3.4 billion of cash and investments on its balance sheet.
That huge cash balance means that more than a quarter of ATVI's share price is made up of risk-free cash. On an adjusted basis, that means that the firm currently sports a P/E ratio of just 10. A big part of Activision Blizzard's cash generation capabilities come from the ongoing service component that its multiplayer games feature. With Wold of Warcraft, for instance, some 10 million subscribers pay a monthly fee to play the game online with other players in real time. That subscription component provides ATVI with recurring, high margin revenues. And they're sticky too. Because gamers have a massive sunk cost in building characters and attaining status, they're a lot less likely to switch to a competing franchise and restart the process.More recently, Activision Blizzard has been working to integrate that same cash cow model into more traditional game franchises. The firms' Call of Duty Elite service is the best example of that right now. The franchise model is another big benefit for ATVI shareholders. Because the firm can build on the popularity of its past successes within a franchise, it's able to court fans of those games with minimal extra effort. As ATVI continues to pile cash in its coffers, investors are going to need to pay attention. This stock has dramatically reduced fundamental risks thanks to that mountain of money.