Activision Hopes To Attack With New 'Call Of Duty'

Activision Blizzard on Tuesday launches its biggest weapon yet in a bid to break out of the doldrums -- releasing what many call the most anticipated game of the year -- "Call of Duty: Modern Warfare 2."

In the third quarter, the video game maker saw its year-over-year sales fall for the first time since 2007, hurt by the economic downturn and slowing growth for its music games.

The company's stock closed up 2.6% Monday, at 11.54, but is down 12% since early June. IBD gives the stock a Relative Strength Rating of 20, meaning 80% of stocks have outperformed it in the past 12 months.

The big question is whether Activision's (NasdaqGS:ATVI - News) slate of holiday games can spark a rebound.

Leading the slate is "Modern Warfare 2," the sequel to Activision's monster hit "Call of Duty 4: Modern Warfare," the best-selling first-person action game. The earlier game, released two years ago, has sold more than 13 million units worldwide.

Analysts say Activision could sell 10 million to 12 million units of "Modern Warfare 2" by year's end. The $60 combat game is rated M for mature audiences, or gamers 17 and older, because of its violent content.

For Activision, the holiday sales quarter is about balancing "the certain success" of "Modern Warfare 2" and the "uncertainty around the remaining portfolio," said Mike Hickey, an analyst with Janco Partners. He rates the stock a buy.

Activision's other big titles this season include music games "Guitar Hero 5," "DJ Hero" and "Band Hero," now in stores, and skateboard game "Tony Hawk: Ride," set for release on Nov. 17. It also has just released the kids' video game "Bakugan Battle Brawlers."

But "DJ Hero" and "Tony Hawk: Ride" are expensive because they come bundled with special controllers. Both cost $120, twice as much as a typical console video game. "DJ Hero" comes with a turntable controller and "Tony Hawk: Ride" a skateboard controller.

Those games are a "tough sell" in this economy, with consumers watching their spending, says James Hardiman, an analyst with FTN Equity Capital Markets.

Yet, pre-sales of a special edition of "Modern Warfare 2" that came with night-vision goggles and cost $150 sold out fast, Hardiman says.

Investors are concerned about slowing sales in the lucrative music games category led by Activision's "Guitar Hero" franchise.

"A lot of the weakness in the shares is a reflection of concerns over 'Guitar Hero' franchise fatigue," Hickey said. But Activision can still be creative with that business to boost sales, he says. For instance, it could offer a subscription service for music games software.

"When I look at the fourth quarter for Activision, the question is: Can the growth of 'Call of Duty' offset the decline of 'Guitar Hero' and the music genre? And I think the answer is yes," said Hardiman, who rates the stock a buy.

Weakness in the overall video game market also has hurt Activision. U.S. sales of video game hardware, software and accessories January through September fell 13% from the year-earlier period, says retail tracker NPD.

And analysts are questioning Activision's 2010 releases.

"People realize, 'So you have a very successful release of "Call of Duty," but then what do you do for us next year?' In the near term, they're really a victim of their own success," Hickey said.

Analysts polled by Thomson Reuters expect Activision to earn 64 cents a share for 2009, up 8%, on sales of $4.55 billion, down 9%.

"We believe we have the industry's strongest holiday release schedule," Activision Blizzard CEO Robert Kotick said in a statement when the company released third-quarter results on Thursday. "... We believe that our strong balance sheet and solid cash position, coupled with our leading franchises, operational capabilities and broad global reach will enable us to take advantage of the long-term opportunities afforded by our industry."