Hi all...Was hoping to get some input from the regulars and then toss in my 2c as well.
My question is whether even upside potential for Skylanders is enough to matter.
Here is why:
--I am not ATVI knowledgable but I am research-oriented investor.
--I am getting my boys the Skylander game for Christmas as are a decent number of other people I know.
--So in seeing if this could translate to investing, I was disappointed to realize that Skylanders was a tiny piece of 1 of the game biggees and less likely to swing anything stock-price-wise.
But here is the thing. Having 3 children under the age of 10, I think Skylanders could prove revolutionary and absolutely huge. Kids these days from families with some money like to do 2 things - play video games and collect things. Everyone here is aware of the trajectory for video game sales and how much money top titles make. But the intersection of that and collecting is revolutionary. Remember silly bands? $5 for 12-20 rubber bands in shapes. Took off like wildfire once a few kids at the schools get them and then everyone else needs them. Collectible toys (Beyblades, Pokemon cards, Bakugan, etc.) also are strong. Priced just right at that $8-10 mark they easily fit in a kids' allowance budget or a "you did good in school" gift from mom and dad. And they sell like mad.
So IF the Skylanders game proves decent (research on early reviews is very favorable from both kids and adults), this video game could be the biggest thing in video games for the under 12 crowd and families since I'm not sure what...
Think about it:
--A role-playing kind of game where you battle stuff, improve your abilities, develop your characters, etc. This is right up this age groups ally who eat up Pokemon, Beyblades, etc.
--And as a nifty feature, you skills/stats/whatever are all carried in your little figurine which makes them transportable to your friends' house. This is pretty cool compared to arguing over whose house you play at because you want to use your #1 character rather than your buddy's castoff.
--But from a business angle it gets even better. On most video games for this age bracket, the game company makes all their money from selling the game. The only upside to a popular game is the extra sales and the probable success of the next iteration of it (i.e. Mario Bros family). But not with Skylanders. There is a set of 40 collectible figures available priced in the sweet spot of $8 that fits an allowance budget. With Skylanders ATVI has created a razor/razor blade model for the game. At $70 retail for the game plus a starter set of figures, I would guess that ATVI makes slightly more than they do on the regular $50 game. But even better. If the game is popular every one of those $70 customers could easily be in for another $50-200 as kids collect the figures to add to their game. And even better, with this age set, it only takes a seeding of kids getting and liking the game for Christmas to start the silly band wave and drive a bunch more kids on board in Jan/Feb.
Sorry for the long post...Hope someone can comment on whether Skylanders could even be enough to matter short-term for ATVI.
I called the Skylanders craze on Dec 5. But I also raised an important question that is still relevant today.
ATVI is a big game company with a ton of moving parts. So far, Skylander's upside appears to be quietly making up for slack in other areas.
Had Skylanders been released by a small game company with a handful of ho-hum titles and a $150M market cap, I would be rich already. Instead, I have watched a few out-of-the-money lottery ticket type options from Feb and Mar expire and am waiting to see if May pans out.
Awhile back the target was 1M Skylanders game units in 4Q. That was probably a little bit sandbagging, but let's go with it. They are up to about 2.5M units now. Something like 1.8M of that (probably a little more) was sold by end of 4Q11.
Other facts we know:
--Whatever ATVI was estimating for figure sales follow on from the game units is way low. Everything that was left after Xmas sold out immediately in 2-3 days. The reasonable volume for mid-Jan restocking sold out as it arrived on shelves and online. Here we are about 3 weeks after the mid-Jan restock and we are back to about 0 inventory anywhere online and sporadic shelf inventory that disappears immediately.
So with that backdrop:
-Upside for 4Q11 is modest. The sale rate of games up to Xmas beat estimates, but there were still game units around. So the result was that a chunk of the Jan inventory got sold off shelves early and probably boosted the restock order for early Jan. Game unit upside would have been in Jan. Also for figures, upside would have been realized in Jan. The magnitude of the shortage and the resulting orders were not realized until the kids opened the boxes on Xmas day and proceeded to clear every single character off the shelves before New Year's. This drove a bigger and faster restocking order than the mid-Jan target but little if any of this pulled into Dec.
--I estimate current upside for 1Q12 at $100M in sales with potential for more. Here is the math. For let's say 1.5M units that ATVI baked into guidance (and analyst into estimates), let's assume that ATVI counted on 6 additional figure sales per unit at $4/unit (price to retailers). This number has obviously proven low. So let's call it 12 figures per unit. The result is an extra 6 figures X 1.5M games X $4/figure = $36M. They have also sold 1.0M additional game units (through Jan 28 rough number is 2.5M per the VGChartz stuff). So if you take those extra 1.0M game units X 12 figures/game X $4/figure = $48M. Now add a little bit for the extra game unit sales in 1Q12. If ATVI was estimating about 1M units through Xmas that would suggest maybe another 500k-750k in 1Q12. They have already sold about 1M more game units in 1Q12. A conservative view would say something like 1.25M units (for all of 1Q12) - 750k built into estimate X $30 unit (their price to retailers) = $15M.
When you add it all up, you get $100M of upside revenue compared to what you would figure was baked into 1Q12 for Skylanders. Again, the 4Q11 impact is modest. And against the huge Xmas WoW and COD numbers it is irrelevant. But if I am right, $100M upside to sales for 1Q12 would be a difference-maker. Revenue is currently pegged just under $800M by analysts, so this is +12.5%. Even if the profit margin on these sales is 50% (so $50M additional profit) you get an EPS boost of 4-5 cents per share which is sizable on top of a $0.14 estimate right now.
Over the past month or so analyst estimates for 1Q12 revenue has actually trended down from $805M to $796M. It does not seem that analysts have made any positive adjustment for Skylanders, or alternatively they have taken WoW and/or COD way down from original estimates such that Skylanders was just an offset. Seems unlikely.
Skylanders upside, Diablo announcement and any numbers beats aside, I think the stock has an easy 10% upside after earnings if they simply report that WoW is flattening out (not growing just not decreasing too rapidly). This significantly de-risks the stock. The stock is down about 10% in the face of increased 4Q guidance and blow-the-doors-off early COD numbers. Simple provide lower variation/higher predictability for WoW, and the stock jumps. The trifecta that I am hoping for couples that with
--Finally an official Diablo date that puts this revenue stream firmly in the spreadsheets.
--Skylanders 1Q12 upside noted above.
makes for a trifecta and a >10% stock jump in the next couple weeks.
I think I touched on this in my 2nd or 3rd post way back in early Dec as compared to Pokemon.
Pokemon was absolutely huge. It still is to some degree. But the video game and the cards/other stuff were never connected. There were actually many kids who played the games and could care less about the cards and also vice versa. They were completely separate. Same is true for Bakugan and any other attempt to take a toy and turn it into a video game or vice versa. They were always separate. Unless I am missing something Skylanders is unique in that it is the first combination where the toys are actually part of the video game. The difference is subtle but very important if you understand buying habits and the viral nature of how these kids buy/collect things and how they spend their free time. Kids that build up an army of the figurines are automatically in for the next game. And kids that have the game can't help getting more figures.
It is a bit of an aside, but I also used the example of silly bands. That craze went from a few kids having them at school to parents asking what kids were talking about to 8-10 parents waiting around the Hallmark store as they unpacked their latest shipment. Skylanders has reached that proportion. Kids are fickle. Video game players are fickle. The intersection of these is also fickle. But short-term, through the 2nd release in time for next Christmas, I just don't see how this thing once you count the toys doesn't do 5X whatever ATVI originally hoped for.
Another aside that drives home the point...On EBay right now "loose" Ignitor and Dark Spyro characters are regularly selling for $15-25 (plus shipping). Why are they all loose not packaged like the others? Those are 2 of the 3 characters that are only available via buying the full pack (game, portal, etc.) for the Nintendo 3DS handheld. There is actually money to be made right now by buying discounted ($50 sale price now and then at Target, Best Buy, Amazon, etc.) 3DS game packs and breaking them down to sell the individual figures. Again, you have kids who are going to collect them all, so it's the only way to get these 2 short of buying the 3DS set. That combined with the fact that it is just hard to find any Skylander at a store must be making it bearable for parents to shell out the EBay price and get one of these "rare" ones that you can't find by itself at the store.
I will post some rough math for what I think Skylanders means for 4Q11 (not much) and 1Q12 guidance (a lot) tonight after my kids go to sleep. Might as well stick my neck out all the way at this point.
There is no official statement regarding Diablo's release date or if it will be for console as well. I would say that during the earnings report tomorrow there is a good chance we will here more news about Diablo.
If I recall correctly, Activision proclaimed Bakugan as a new, hot IP in 2009 and listed it in several conference calls as a significant revenue contributor.
Not sure how hot Bakugan is now, but clearly Skylanders is not the first foray into the world of toys for Skylanders (contrary to some assertions). Is Skylanders an accrual or extension of this? Or a replacement?
Just got a phone call from my daughter-in-law. She took my grandson (5 years old) to the store to purchase Skylanders for Valentine's day (not sure why he deserved something for Valentine's day.). But, the store had a two per person limit. The demand for these has far outstripped supply. Without question, Skylanders have replaced transformers as the new must have toy.
Not to go off topic on the ATVI board about GMCR, but I think the cost is very reasonable given the variety of brewers available and the lack of waste since you can make a single cup in the late afternoon and not throw a whole pot away. Also I had a unit that was not working after about 5 months and their customer service was outstanding. They overnighted me a brand new unit and only wanted a piece of the old unit back so that I would no longer use it.
I do not think it is at all like GH from a concept standpoint but more from a "I hope they don't run it into the ground standpoint like GH." Even given the difference, if they push too hard they will alienate many who can see this for the money grab that it is. Perhaps they set up a club or rewards program so at least die hards can get or at least feel like they are getting a break on the prices.