Is Activision Undervalued?

Activision Blizzard, Inc. (NDAQ: ATVI) consumers may be playing games, but the company is making some serious cash. The videogame manufacturer has seen its shares cut in half over the past 52-weeks, but the industry is very resilient and several big name titles could provide a much needed catalyst. So, when is a good time for investors to pick up a stake?

Activision Blizzard is well known for its strong portfolio of notable titles. Guitar Hero has become a household name with commercials featuring NBA All Stars and singers. Meanwhile, World of Warcraft has grown to become the largest online multiplayer game – it even has a rock legend in its commercials! And the company’s upcoming release of StarCraft promises to be another blockbuster release.

Activision Blizzard is also very strong from a financial standpoint. The firm has no debt with a relatively modest price-earnings ratio of 24x. The company also continues to benefit from low overhead costs via online sales and limited capital expenditures. In fact, Activision is one of the few remaining profitable companies in its industry, unlike competitors like Electronic Arts (NDAQ: ERTS).

Overall, Activision represents a strong growth play that could pay off in the long-run despite some short-term volatility. Investors looking to buy into Activision without taking on all the risk might want to take a look at long-term options called LEAPS – or long-term equity anticipation securities. These options can help investors dramatically improve their return on investment while putting less capital at risk.

Currently, investors can purchase $10.00 January 2011 LEAPS calls for just $4.00 per contract. This would give investors the right to 100 shares at $10.00 per share anytime during the next 760 days. The breakeven point would then be $14.00 per share – a 40% premium over the next two years. Meanwhile, investors would risk only $400 upfront versus the $918 required to buy the underlying stock now.

See “Using LEAPS as a Stock Substitute” for more information or check out our e-book “Trend Trading on Steroids” for a more comprehensive strategy.