Apple ( AAPL) shareholders are begging for another iPhone-like invention, something so revolutionary and entertaining that sales of it stay in the stratosphere for years. Apple created incredible shareholder riches with such wow-inducing new products for a decade, and its inability to produce something equally dramatic lately has sent its share price plunging as seen in a stock chart.
But ordinary companies don't change the world every three years, even when their livelihoods depend on continually launching hot new products. To understand a more normal life as investors in inventive companies, take a look at Activision Blizzard ( ATVI), a $16 billion market cap video game company.
Activision's success depends on its ability to consistently roll out hit games. In fact, the company's 10-K lists this dependency on "hits" as the first risk factor to investors. The business model requires the company to correctly predict gamer tastes and preferred platforms months if not years in advance, and the development costs pile up long before any revenue come from them.
Ideally, big expenditures on product development are followed by big jumps in revenues, as the chart shows they did recently. That decline in R&D expenditures and spike in revenues last spring corresponds to the record-setting launch of "Diablo III." Much of the revenue gains this year are related to new "Skylander" and "Call of Duty" games.
ATVI R&D Expense TTM data by YCharts
Activision has done a great job of creating hits, consistently landing new games on top-seller lists. New games for its top four franchises - "Call of Duty," "World of Warcraft," "Skylander" and "Diablo" produce the vast, vast majority of Activision's earnings in any given year; sort of like new iPhones and iPads have been doing for Apple lately.
Activision's talent for hits hasn't made it a great long-term investment. Increasing competition from heavyweights like Walt Disney ( DIS) and Electronic Arts ( EA) necessitate new games more often to keep customers' attention. New platforms, such as new versions of PlayStation and Wii, require more development and bring more uncertainty to the process. There's always the worry that the next game won't be a hit to provide those expected episodic profit boosts. The share price traded between $10 and $12 for the better part of three years, as seen in a stock chart, before jumping this spring on a couple of big hits and cost controls.
You won't find the word "hit" in Apple's 10-K, although it's exactly those types of products that made an Apple investment wonderful for so long. With the competition overtaking iPhones, and catching up to iPads, investors wonder if Apple can continue solid sales growth with ordinary new products, like those new iPhone versions. Apple hasn't reported an annual sales decline in a decade, but in Activision's experience, it's not unusual to see overall revenues decline between product launches. Activision's revenues are expected to decline 14% this year. Investment analysis is essential, but knowing what's cool, in the cases of Apple and Activision, may be the better data point.
ATVI Revenue Quarterly YoY Growth data by YCharts
Regardless of their issues, analysts expect both companies to do well for investors. Each gets buy recommendations from more than 70% of its followers. Some of those bullish Apple analysts are looking for a new blockbuster product to fulfill their expectations. Activision optimists expect the company to produce hit products, but not revolutionary ones. And apparently, they're willing to endure the ordinary ups and downs of hit making on expectations of gains in the long run.
Right now, investors seem to have a lot more confidence in the game maker than they do in the gadget maker.
ATVI Forward PE Ratio data by YCharts
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.
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