By Jay ZalowitzFor Activision Blizzard ( ATVI), the release of the much-awaited Starcraft II and Diablo III should lead to some unexpectedly high sales and fuel purchases of the predecessor games in the series. I expect these rollouts to be comparable to Bungie's Halo III release. My basis for this is that after a short poll of "gamers" among my group of friends and looking at communities that deal with game on the Internet, there are very few gamers who are not considering buying this release. A short history of these two series is that they are the originating brand for the majority of these types of games. Starcraft was released in 1998 and has sold over 11 million copies worldwide, and despite being a computer game that is over 12 years old, is still on store shelves. It has a pro gaming league around it, and there is a class at the University of California-Berkeley that teaches theory and strategy for it; in a word, it's big. Diablo has a similar following, with 17 million copies sold, including a programming community built around modding it.
Finally, ATVI has a team developing products for smartphones and the like (iPad). ATVI has a forward P/E of 14.59, almost too low for a game company, whereas competitor Electronic Arts ( ERTS)(beneficiary of a large recent options bet that the stock would grow another 37% by the beginning of next year) has a forward P/E of 30.38. According to my estimates of $200 million in unpredicted revenue due to a large amount of pent-up demand for these games, as well as the high probability of selling multiple copies of the game to single households, it's not unreasonable to expect a EPS of $1.10 next year. At Thursday's closing price of $11.96, the forward price-to- earnings ratio would be only 10.87 times earnings for next year. If sales would increase $200 million above expected numbers, this represents an interesting opportunity to investors wanting to add some "game" to their portfolio. If the stock would match the current valuation, it would not be unreasonable to expect a valuation of $16 if you multiplied the same forward P/E of 14.59 to the new earnings prediction for next year of $1.10 a share. (14.59 X $1.1 = $16.05)