Activision Blizzard

If you are a gamer like me, investing in Activision Blizzard would be a smart move. This company helps produce and develop some of the best-selling video games. Activision Blizzard is ranked 5th of the world's top richest video game developers in the world. It is worth about 4.85 billion dollars. Activision helps with creating the 4th best selling game ever. The Call of Duty or C.O.D series was first released on October 29, 2003. Since was released, the game has sold over 250 million copies (units) on consoles and on the PC. And they have even released mini games for phones. As it is that Activision has only helped to develop this series, it has created another game that is on the PC. To have the world’s most popular online role-playing game like World of Warcraft or W.O.W. as their own, Activision Blizzard is assuredly not losing much sleep at night with this franchise in their arsenal. Specifically, Morgan Stanley is resting its hopes for Activision Blizzard stock and Electronic Arts stock outperforming the market on the prospect of gamers spending more money on in-game purchases. Such sales of "expansions, new challenges, new characters, etc." could potentially help grow the active user base at Activision 11% a year over the next five years. And Electronic Arts, 5% a year. Revenue, too, should grow nicely with this shift in business model. Morgan Stanley predicts 16% annualized revenue growth for Activision and 15% for Electronic Arts over the next three years. In fact, the analyst says, "digital rev," or "in-game purchases + full game downloads," has the potential to drive literally "all of ATVI/EA forward.” If that sounds like a big bet to be making on the game makers, well, Morgan Stanley thinks it's a bet worth making. After all, it doesn't cost a lot to create an in-game item -- and it costs even less to reproduce it, and nothing at all to ship it. Morgan Stanley sees Activision Blizzard's and Electronic Arts' decision to focus on this market as giving a potentially huge boost to profit margins: "We see op margins heading ~650 bp higher between now and '18 for both names," says the analyst, resulting in five-year earnings growth rates of 17% for Activision, and 14% for Electronic Arts. Viewed from the perspective of free cash flow meanwhile, the conclusions are reversed, but still similar. Over the past year, S&P Global Market Intelligence data show Activision generating $1.5 billion in positive free cash flow, which was more than twice the company's reported net income, and enough cash to give the company a price-to-FCF ratio of just 22. That's still a bit expensive for 17% growth, but less expensive than the P/E ratio makes it look. Electronic Arts, on the other hand, generated just $937 million in FCF over the past 12 months, or only $0.81 in real cash profit for every $1 claimed in GAAP net earnings. Result: EA's P/FCF ratio of 27 is a bit more expensive than its P/E ratio makes it look -- and probably costs too much for 14% growth, in any case.