"Modern Warfare 3" Hits the $1 Billion Mark: Why It Doesn't Matter

By Michael Comeau Dec 12, 2011 2:30 pm

Activision Investors should focus on "World of Warcraft" rather than "Call of Duty."

Activision (ATVI) announced this morning that November's Call of Duty: Modern Warfare 3 hit the $1 billion sales mark in just 16 days. It rang the register even faster than the 2009 feature film Avatar, which accomplished the same feat in 17 days.

So why is Activision down today? And why has it been underperforming the Nasdaq (^NDX) ever since it released Modern Warfare 3?

Simple -- Call of Duty's firepower may be unmatched by any other entertainment franchise on Planet Earth, but the reality is that everyone knows that -- and that means it's priced in.

Just look at this recent timeline:

1) November 8: In the morning, Activision launches Modern Warfare 3 to very positive reviews (see: Modern Warfare 3: Do Reviews Matter?) and massive consumer anticipation. Intraday, the stock hits a multi-year high of $14.40, before closing at $13.93.

After the close, the company releases an impressive third-quarter earnings report, with inline guidance that the company's likely to beat. However, the bears zero in on a significant decline in World of Warcraft subscriber numbers, sending the stock down 6.5% the next day. (See: Activision: "World of Warcraft" Drives a Growing Bear Case)

2) November 11: Activision announces that Modern Warfare 3 sold more than 6.5 million units in North America and the U.K on its first day, a 16% increase from 2010's Call of Duty: Black Ops.

3) November 22: Activision reports that over one million gamers signed up for premium memberships to the Call of Duty Elite service in its first six days on the market. The company notes that Netflix (NFLX), Sirius XM (SIRI), and Microsoft's (MSFT) Xbox Live each took approximately one year to pick up one million paid subscribers.

4) December 12: As mentioned above, Activision announces that Modern Warfare 3 did $1 billion in sales in its first 16 days on the market. However, there was one negative surprise in the press release that didn't get much notice: Activision said once again that Call of Duty Elite had hit the one million subscriber mark, implying surprisingly little growth since November 22.

So What's It All Mean?

And as it stands now, Activision is trading 16% below that November 8 peak, indicating that the easy money in Activision was made on the stock's move up from the summer lows into the Modern Warfare 3 release.

From a bigger-picture perspective, it's obvious that we're years away, both literally and figuratively, from 2007, when Wall Street wasn't quite aware of just how big Call of Duty could be.

So now, investors are looking past Call of Duty to assess what's right and what's wrong with the rest of the business, namely the health of its number-two franchise, World of Warcraft.

Now Activision does have some things going for it. It has the best portfolio in the business. Its Skylanders game will likely face shortages at retail throughout the holiday season. And Its Blizzard unit will crank out new World of Warcraft, Starcraft, and Diablo content in 2012.

However, that doesn't change the fact that investors are zeroing in on those World of Warcraft subscriber numbers, especially since Electronic Arts (ERTS) is launching the competing Star Wars: The Old Republic on December 20.

Think about it. The good news from the number-one franchise is well-known and priced in, and the number-two franchise is generating worry just as a new competitor is stepping onto the block. And it's not like Activision is some hated stock where expectations are low. Wall Street loves it. Of the 22 analysts covering Activision, 19 rate it a buy and three call it a hold, with zero sells.

To me, the ongoing decline in sentiment toward World of Warcraft means the advantage lies with the Activision bears, at least for the near-term.

And a quick word on Intel (INTC)...

As you may know, this morning, Intel lowered its fourth-quarter revenue guidance by 7% today due to hard-disk drive shortages.

I'm not buying the excuse. The HDD shortage is nothing new, and I find it hard to believe that Intel didn't realize sales would be impacted by $1 billion until the quarter was 80% over.

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