Tobold's Blog
Thursday, November 24, 2011
Don't take financial advice from gamers

MMOClash reports a financial analyst downgraded Activision Blizzard stock from "buy" to "neutral" based on an online survey with 381 gamer participants. Now personally I wouldn't buy Activision Blizzard shares; their main cash cow is aging, and the games business is extremely volatile. But I do have doubts whether accurate financial forecasts can be achieved by asking a few hundred gamers.

The first problem with asking gamers for financial forecasts is that you can't get a representative sample. People reading game sites and blogs, and willing to fill out surveys, are already a minority with a stronger than average interest and emotional investment in games. The second problem is that opinions about games usually overshoot the target. It's all hype and talk about the best game ever when a game is new, followed by all gloom and doom predictions. The usual train of thought goes like this: "I lost interest in this game. So the game must have become much worse, and everybody else must lose interest as well. The game is doomed.". You basically get mostly extrapolations where one guy looks at a sample of one, himself, and uses that to predict the behavior of 10 million players. That is statistically unlikely to give a good result.

If we could make accurate financial forecasts about game company shares based on let's say having lost interest in WoW and having liked SWTOR in the beta, we would all be rich. The fact that we aren't tells us that our opinions might be interesting to discuss, but can hardly be considered solid financial forecasting information.

I'd be more concerned with Activision Blizzard's $3 billion in cash that they seem incapable of knowing what to do with. Reinvesting some of that in themselves or their aging properties is obviously out of the question, for whatever reason.

It's kinda funny though, how we and financial analysts can pooh-pooh companies with zero debt of $3 billion in cash. It's not like they are making less money each year.

The chasing of the mythical year-over-year infinite growth is really what will doom us all.
Actually, I'd say right now is almost the best time to get ATVI. Call of Duty alone should boost the 4th quarter numbers with the millions of copies it's sold. Next year has Blizzard releasing Diablo 3 and Mists of Pandaria, with a decent chance of Heart of the Swarm. These should boost Blizzard's figures even in the midst of a weakening WoW base. So this pullback of the stock price (it's been pushing a 52 week high since the last quarterly report) is a great time to jump in for the next year or so.
I wish I could guess when exactly the hype for Titan will start building because I would buy the hell out of blizzard shares right before then, especially if wow's reputation ends up crashing before that point.
Exactly because of the hype and "gloom and doom" they are right.

The games depend on hype. If the word of mouth is bad, the game can go down without actually be bad.

This is a very volatile and emotion-driven market, where "what people think" matters.
There is no solid financial forecasting, except for insider information. If there were, we would all be very rich .. which means that nobody would be rich.

Financial Analysts are just doing their job. It is not a 'nice' job.
The strangest thing about that report, for me, is that the analyst felt any need to link to actual data.

Usually, when an industry analyst makes a claim, it isn't required to show any evidence other than the authority of the analyst themselves (how many times have we seen a 'Michael Pachter predicts that...' without any evidence other than, y'know, Michael Pachter himself?)

So, for me, that report is interesting because the analyst *wants* to downgrade his Activision Blizzard stock recommendation, but doesn't have the reputation (or the courage, perhaps) to rely solely on his reputation to justify the call.

And the reason I think this in the case is the magic number '381'. There's a very clear and simple formula for determining the minimum sample size of a survey: it's n = (Z.Z.p.q)/E.E (sorry, can't add square notation). Assuming a fairly standard 95% confidence interval (Z=1.96) and a rough and ready margin of error of +/- 5%, you get a minimum sample of... around 380 people.

That's pretty rough, admittedly: a 5% margin or error is quite large; however, for most quick and dirty market research purposes, it's good enough. A much more reasonable 3% margin of error gives a minimum sample size of around 1000 people, but that's obviously harder to organise and longer to conduct; thus 380 is the magic number for quick n dirty survey research.

So seeing the sample size of 380 makes me immediately think that the analyst wanted *some* data to buttress his opinion, but didn't really care about outcome of the data because, well, the data's purpose is to support his opinion, not alter it.

A sample size of 380 is not eo ipso too small, it's just very rough; and its purpose therefore is to buttress an otherwise possibly risky opinion - risky opinions being the one thing an industry analyst is *not* allowed to have, unless their reputation, like Pachter's, is big enough to cause the result they predict.
"u mad bro"

Now is a good time to buy Activision Blizzard stock specially if, due to "wow failing" and news like this make the stock price go down (i doubt it, but still).

Pretty soon with diablo and starcraft part 2, the stock will go up and probably some people will make lots of money if they invest heavily now.

but of course asking gamers, hedge fund managers, monkeys ou coins about stock will yield, all other things being equal, the same results. with human volatility and animal spirit you can never predict how a stock will evolve.
Based on the patterns of the sacrificial cow's innards and the trajectories of flying birds, I'd say that today is a good day for buying Activision Blizzard's stock.
In another online survey, 52% of the respondents (of 120k total approx) had signed up for the annual pass. some had already quit WoW.

It would be wrong to read too much into those figures as well. I mean you could say that they would loose another 5 million subs.

The truth is nobody knows, ToR could tank or even appeal to a different audience.
Seems like a contrarian 'buy' might be in order, if that brokerage house is influential!
I bought (and sold) activision ages ago, before WoW, at $15/share. Its selling for below $12 now. Games companies are a dubious investment at best. If you cant get in them at IPO i wouldnt bother.
Financial Analysis:
Gev and Nils are right on. The other issue is the tail wagging the dog one. The analyst is essentially deciding, not predicting, what happens to the stock demand. He gets props for even including actual gamers in his analysis.

Unfortunately, the "I talked to over 350 gamers" is really used to bolster his opinion and sway other analysts and investors.
You can't get a representative sample of opinion about gaming by asking anyone but gamers, though. If you asked 381 non-gamers about Activision/Blizzard they would have no idea what you were talking about. Ditto WoW.
How can Activision be in trouble? WOW has a new expansion, Diablo III is on it's way, and in the present and very real Christmas market, Skylanders is taking off like wildfire.

Oh yes, a couple guys hate pandas. They hate WOW now, and thus everyone else must hate this new regime, so time to dump Activision. They're so totally right, as no one will be able to cash in on pandas...
Tobold and others have made some excellent points about the 'failure' of WoW. One is that there are so many ex-WoW players that, just from that player pool alone, TOR cold be a smashing success without a single player leaving WoW because of it.

The second point is that A/B understands player fatigue very well. The company understands that the old, burned-out WoW lags are not the future market. Mists of Pandaria is part of the effort to reposition WoW for a new crop of players, who A/B hopes will play the game for another five years.
The opinions of online gamers would be a truly horrific way to determine how to invest in game companies.

I hear tons of people complaining about how stupid Call of Duty is. You'd never guess by how stupid and lame it is that it sold more in its first weekend than your average massive blockbuster movie makes in its whole theatrical run.
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