The Real Battle in “Call of Duty: Black Ops II”: Who Gets the Profits?

Who will win the real-world battle to capture the most value from what seems certain to be the next victorious videogame launch from Activision Blizzard (ATVI), “Call of Duty: Black Ops II”: the game’s designer, or GameStop (GME), the big videogame retailer that has gained market share and now is counting on the latest title’s success to power its year end earnings?

There’s no question that the latest Call of Duty game, which went on sale November 13, is a slam-dunk success. On its first day on the market, it racked up $500 million in global sales, thanks to thousand of midnight store opening events reminiscent of the Harry Potter frenzy that greeted each new book. The first-day performance by the new Call of Duty title trumped the performance of last year’s holiday release, “Call of Duty: Modern Warfare 3”, whose first day sales reached $400 million. The hope is that the new game will help to revive interest in videogames that has taken a bite out of GameStop’s rate of growth in both revenues and profits.

GME Revenue Quarterly YoY Growth Chart

GME Revenue Quarterly YoY Growth data by YCharts

A period characterized by a relative drought in the number of new releases that analysts see as appealing combined with a lack of new hardware products reaching the market is starting to come to an end, with the release of new titles like this and new consoles making their debut. (The new Nintendo Wii U is already on the market; consoles from Sony and Microsoft (MSFT) are in the offing.) GameStop isn’t relying on sales to power improved earnings, however; it will close about 200 retail sales after the peak holiday sales period, a move that analysts expect to improve profit margins, which have nosedived in recent months.

GME Profit Margin Quarterly Chart

GME Profit Margin Quarterly data by YCharts

Awaiting the results of this turnaround, does it make sense to invest in Activision instead? Unsurprisingly, it commands a higher PE ratio – but that valuation has grown less than that of GameStop in recent months, while GameStop offers a significantly richer dividend yield.

ATVI PE Ratio TTM Chart

ATVI PE Ratio TTM data by YCharts

ATVI Dividend Yield Chart

ATVI Dividend Yield data by YCharts

By investing in Activision, you’d have a straightforward “call” on the success of the “Call of Duty” franchise – but you’d pay a slightly richer price. It all hinges on what you think is the potential for new gaming consoles and new titles to reinvigorate the videogame business and thus GameStop’s retail franchise. It has all the hallmarks of a business that could be on the verge of a turnaround, one that sales of “Call of Duty: Black Ops II” could help to fuel. But it’s subject to the same set of risks that afflict other retails stocks, from high fixed expenses to the uncertain consumer economy. This is one dilemma that might be resolved by checking in with the most obsessed gamer of your acquaintance for the early buzz on the new devices and this year’s holiday season game releases. If they like the outlook, well, GameStop is a way to play the whole phenomenon, and not bet just on the success of a single title – success that may already be at least partly baked into the stock price by now.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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