Anal-ysing the Analysts

So I was just reading this.

You should probably go read it too – it won’t take a minute. Go on. I’ll wait.
Done? Good. Ok so the tl;dr version is that Black Ops II is trending to be down 15% on sales from the preceding COD game.

And because of that, this “financial analyst” feels that it is “cause for concern” and that Activision’s buy rating should go from “buy” to “neutral”.

Well, several thoughts occur to me reading that.

The first is this – What a financial analyst actually does is attempt to discern trends based on stock price movements vs discernable strategy from the company under observation. So they look at published sales, look at what the stock price is doing, measure that against both what the company says it’s going to do vs what it’s actually done – because the strategy that a company announces (or doesn’t announce) isn’t always what they really plan on doing, or the market will allow them to do – to discern what predictions you can make about the companies immediate future.

The idea being that these analysts are independent, are not just buying into the press releases from the companies they are looking at, and are providing a service to potential investors, the media, the public etc.

That’s a noble aim, to be sure. However, realistically, these guys have no more idea about the reality of their predictions than you do looking at tea leaves. Firstly, they are operating against the exact same data you are. They don’t get private sales data, they don’t get insider information; they operate off NPD sales data, just like you and I do. They operate off what Yahoo Finance gives them in terms of stock performance, just like you and I do. The only advantage they have is that they are trained to do a statistical analysis of the data in ways you and I aren’t.

But ultimately, so what? Being trained in statistics doesn’t suddenly give you a crystal ball to see the future. Knowing how to calculate the Mean, Mode and Median doesn’t help unless you know where to apply those calculations and what to do with the result.

And as with all things, the statistical results have to be framed with all the environmental factors that matter. For example, when ATVI was at the end of the Guitar Hero era, they were doing great guns selling plastic guitars. From a purely statistical point of view, there was every indication that it would last forever. However if you where out in the world, youknew that pretty much everyone who wanted a plastic guitar already had one, and that the bottom was about to fall out of this market.

The thing is, there are a TON of things that affect when games come out, the quality to which they are made and the public reaction to it, and these “Analysts” have no more idea of what the reality of allĀ  that is than anyone else does. Less than the average game developer, that’s for sure. Hell, anyone with kids has more idea about what’s going on with stuff like Skylanders than a ‘financial analyst’ does.

Michael Pacter of Wedbush Securities is another of these pundits that is more often wrong than right with his speculations (go on, test that out. Go look through a few of his public speakings and predictions and you’ll see that he’s actually rightless than 50% of the time. That takes some doing, that does). However, it doesn’t stop him speculating a LOT and getting reported A LOT.

So why is this? If this lot really have less clue than the average game developer about the true state of what’s coming out and when, why is it that everytime we open an official media report, these gems are being reported to us as though they are important?

Well, basically, because there’s no one else really to ask. Any game developer is already in the game and therefore biased. You can’t just report what the companies want you to say via press release (although a lot of these analysts seem to do exactly that a lot of the time) – these guys have set themselves up as the independent view, so they get asked and they get reported.

They don’t honestly have much more a firm clue about what’s going to happen than you or I do, but they have advanced degrees and do nothing else all day and have great titles, so what the hell, I have to fill column inches – what does Micheal Pacter think today?

The other thing that occurs to me is this: What exactly are they expecting here?

The fact is we are just entering a console transition phase – speculation about the next generation has begun in earnest now, which signals a slow down in games / console hardware sales (I’m surprised it’s gone on as long as it has, to be honest). ATVI doesn’t have many high profile products any more, having successfully pared down it’s offerings to just those it makes a ton of profit on, and we have just about reached market saturation on the COD franchise (something that Jason and Vince were fighting hard to stop, but that’s another discussion).

However, they _still_ made more money on day #1 with COD : Black Ops 2 than any other COD product release todate. I’ll say that again, just to be sure you get that. COD : Black Ops 2 made more on day #1 sales than any other COD product release todate.

So why the hell are they recommending a downgrading of stock purchase? Two reasons. A reported decline in WoW subscribers – this is an ebb and flow thing any way, they go up and down. It’s true that they are less now than last year, but they also haven’t brought out any expansion packs recently, and the numbers are still clear and above the “that’s fantastic and we can all wear money hats” line. And the other thing is this perceived decline. Now that’s primarily driven by NPD reporting – which is shaky and very very approximate at best anyway – and also the fact that Activision has changed their first week sales reporting. Previously they’ve released the first 5 days sales. This time they release day 1 sales. The thinking there is they did that because the 5 day sales ARE down, but Activision doesn’t want anyone to know that.

My point here is that even if that is true – and there is NO verification that it is – Activision isSTILL MAKING OUT LIKE A BANDIT ON THE COD FRANCHISE. It’s not dead. It’s not even wounded. It’sstill making money hand over fist and far and above pretty much every other FPS game out there.

I can’t quite believe I’m going to say this, since most people who know me know I don’t hold that much love for Activision, but in the interests of being fair, I have to say this. Activision is still a very very financially healthy company and they are not in any danger of that changing in the short term, no matter what Arvind Bhatia of Sterne Agee thinks. All he’s doing is panic mongering based purely on stats that are not confirmed anyway, because it gets his name in the media and it sounds good.

The thing to remember is that COD is not going to last forever regardless. At some point it will tail off. However, even if it plateaus, it’s plateauing at such a high altitude that frankly, who cares?

It does make you wonder that “financial Analysts” can only recommend a company when it’s expanding. Well, nothing expands forever. The fact is, you can still be a great buy even when you _aren’t_ expanding, and even better buy if you are retracting and retrenching. I may not always like the way Activision makes money, but I am forced to admit that the current exec branch is bloody good at it, and 5% less sales on COD – given the economy and the fact that we are starting a console transition phase – is NO cause for alarm.

Wow. I can’t believe I am actually supporting ATVI here. I guess I’m trying to be fairer than usual!

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