1. Proposal to Buy
Activision Blizzard

2. Basics Ticker: ATVI Current Price: $10.84 Market Cap: $13.81 bn
52-Week range:
$ $13.14
Avg Daily Volume:
11.40 mm
Insider Ownership:
62%
Institutional Ownership:
38%
Dividend:
N/A

3. Investment Thesis We want to invest in ATVI for the following reasons:
strong and unique subscription-based SaaS gaming model
leading publisher of software in gaming sector
diversify our portfolio with exposure to high growth opportunity in gaming sector

4. Company Profile handheld, PC, and console games
Activision Blizzard
Activision
Blizzard
handheld, PC, and console games
carry a high one-time cost
online subscription-based games
carry low cost monthly fee
Strategy emphasizes market share growth based upon increasing
their subscription base and popularity of retail game series.

5. Customers & Competition
consumers who use and enjoy the product
include subclasses of subscription and retail customers
Competition
other companies that publish video games either in retail or online
include: Electronic Arts, Sony Corp, and Take-Two Interactive Inc.

6. Growth Direction vs. Risks
Activision’s videogame sales waning
Blizzard preparing for huge releases in the next year
Increase market share and subscription revenues by tapping international markets
Duplicate recent successes of popular retail titles
Volatility of game console wars
Revenue depends on small number of franchises
Industry/ATVI respond to drops in discretionary income
Recent insider trading may cast a negative light on the companies prospects

7. Available Products Activision: Blizzard: Call of Duty
Guitar Hero/Band Hero/DJ Hero
Tony Hawk
Games based upon licensed properties from LucasArts, Marvel, and DreamWorks Animation
Blizzard:
World of Warcraft
Starcraft
Diablo

8. Recent News Positive Negative
Call of Duty Modern Warfare 2 Surpasses $1bn in Retail Sales Worldwide: MW2 continues to set sell-through records since its launch in November, in the first five days alone the game sold $550 mm worldwide, there are only a handful of entertainment properties that breach the $1bn mark
Guitar Hero Kicks Off 2010 With Great Downloadable Tracks: To jumpstart revenue from the Guitar Hero series, Activision released downloadable singles on its website.
S&P Ups Rating To Strong Buy: Standard & Poor’s equity analyst Jim Yin raised ATVI to Strong Buy from Hold while noting its recent fall with the industry. He quoted strong Call of Duty sales, subscription revenue, and expansion in China as optimistic signs for stock.
New ZBoard Keyset Based on StarCraft II: SteelSeries peripheral manufacturer created a customized keyboard in preparation for the upcoming release of Starcraft II.
Negative
Subscriptions Strong; Console Games Weak: Many of Activision’s aging console game series are seeing a drop in revenue and popularity which is being balanced by increased subscriptions. Trend expected to continue in 2010 with three large upcoming Blizzard releases.
Video Game Industry Prospects Poor: Console cycle is aging and demand for high-end systems has been satiated. Consumers continue cutbacks in discretionary spending resulting in 13% drop in overall industry sales during November 2009.

9. Balance Sheet Trends
Cash has been steadily increasing from $354mm in 2006 to $2.9bn in 2008
There has been a similar trend in accounts receivable
More than half of the company’s assets are in Goodwill and Intangibles
While accounts payable and expenses have been rising accordingly the company has no long term debt

10. Income & Cash Flow Statements
Income Statement Trends
Company made net loss of $107mm in 2008 because SG&A and R&D expenses surpassed revenue
As a result, retained earnings were negative
Cost of revenue grew faster than revenue in 2008  
Cash Flow Statement Trends
Deferred tax liability account (as a result of differences in tax and GAAP accounting standards) means ATVI will have to pay more in taxes in the future
Cash from operating activities is positive and has been steadily increasing from $86mm in 2006 to $379mm in 2008
Company has been making steady capital expenditures
Company has received most funding from stock issuances

11. DCF Valuation

12. Comparables Analysis

13. Recommendation: Buy Entry Price Band: $5 - $7
Exit Price Band: $15 - $20
Time Horizon: 1 – 2 years
Position Size: $5,000