Activision Blizzard (ATVI) reported slightly better than expected holiday quarter results driven by good sell through of next generation video games.  Along with reported results from competing video game publishers, it appears that the better than expected sales of new video game consoles in 2013 and 2014 are now driving sales of software.  The game cycle lags the console cycle as core gamers initially spend money on hardware, likely reducing the budget available for software for at least several months.  For ATVI, there was added relief in the sales of the latest game in the Call of Duty franchise.  Despite concerns, sales at least met expectations and strongly suggest the franchise remains in good shape.

As important to ATVI shares as the results was the guidance for 2015.  Guidance fell short, mainly due to foreign currency.  The stock sold off 7-8% in after-market trading but recovered all the losses and then a little the next day.  Investors seemed to find the guidance conservative and were pleased that the company announced a $750 million share repurchase.  The guidance did exclude a couple of games, including a brand new game and Call of Duty online.

The share repurchase announcement coincided the Vivendi filing to sell their remaining shares in ATVI.  Vivendi’s stake is worth about $850 million at current prices.  Removing this overhang is a positive and one of the pillars of our bull case is that ATVI would buyback a significant portion of the Vivendi stake, boosting earnings per share and signaling management confidence in the outlook.  Thus far, no announcement about timing of the Vivendi sale or ATVI’s possible purchase of part (or all?) of the stake has been made.

Honestly, we hoped for better guidance and are a little surprised and relived that the shares have responded positively.  Regardless of our view, the action in the shares is a very good sign and clears space for the stock to catch up to the giant moves in Electronic Arts and Take Two Interactive shares.  Sometimes all it takes for a stock to act well is removal of some investor concerns.  In ATVI’s case, worries were everywhere with 2015 guidance, Call of Duty sales, and the Vivendi sale paramount.  Northlake saw these worries as opportunity because ATVI’s valuation was depressed relative to its peers and the broader software cycle should be a rising tide that lifts all boats..  Now that worries are in the rear view mirror, ATVI shares can reach our original $24 goal and upper $20s is reasonable if the guidance proves conservative as we expect.

ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake regulatory filings can be found at www.sec.gov.  ATVI is a net long position in the Entermedia Funds.  Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies.  Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.