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Activision Blizzard Inc. (NASDAQ:ATVI) Looking To Retool - Fred Dunsel (03/15/12)

 March 15, 2012 12:37 PM

Last Friday, videogame maker Activision Blizzard Inc. (NASDAQ:ATVI) closed at $11.91, marking a 2.06% gain for the week. After bottoming out in early March, the stock is now down 3.17% for the year. The sharp drop of 2.25% on 1 March came about after the Santa Monica, Calif. game maker announced that it was cutting a tenth of its workforce, even though it pointed out that an overwhelming majority of the job cuts were not "related to game development". Activision also emphasized that the layoffs have already been factored in its earnings forecast and will not affect its results this year.

Nonetheless, many analysts note that the company now needs to find a new growth engine besides the seven-year old World of Warcraft, especially since subscriber numbers for Warcraft have declined steadily in recent quarters. (The company ended 2011 with 10.2 million subscribers, down from 10.3 million in the previous quarter.) It is generally thought that Electronic Arts' new Internet game, Star Wars: The Old Republic may be chipping away at the Warcraft's user base. John Taylor of Arcadia Investment Corporation said, "Warcraft was a money machine for many, many years. The subscription numbers peaked out and have been eroding over the last several quarters. It is no longer a growth driver."

[Related -Activision Blizzard, Inc. (ATVI) Q4 Earnings Preview: February Usually Rings Up High Scores]

Because of this, the company's short-term profit growth will be more driven by its line-up of major titles to be released this year, such as Skylanders: Giants and Call of Duty 9. Activision is also banking on its Skylanders franchise for long-term growth, billing it as its next $1 billion franchise. The Skylanders figurines were the toy industry's biggest selling accessories last year, while its online virtual world – Skylanders: Spyro's Universe – already has more than 1 million users. The company is planning to launch a major marketing and retail campaign to get ready for Christmas, and has even concluded a deal with Penguin to produce a range of books.

[Related -Activision Blizzard, Inc. (ATVI) Q3 Earnings Preview: What To Watch?]

Given the above, analysts remain optimistic about the company's future growth. William Blair, which keeps an "outperform" rating on Activision, believes that the stock has 50% upside potential over the next 12-24 months should the company's current publishing and Blizzard margins prove sustainable.

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