Let’s start with the current ATVI build-up, well, Blizzard (best margins):
To ballpark some WoW revenues, Let’s assume it has 10M subs. China pays on average 5$/month. The U.S./Elsewhere 15$ a month. Let’s assume China makes up half of the market:
While WoW only deals in 1 type of currency, gold, Diablo 3 will have 2 currencies: gold and real money. In WoW, gold is useless outside of the game.
Diablo 3’s gold would be just as useless as WoW’s, except that this time around real money is involved. Since there will be an official exchange rate between real money and gold, the latter will obviously have real value outside of the game.
Whether the total amount of gold in Diablo 3 will be higher than that in WoW remains to be seen but I tend to believe that it will surpass it greatly. Leaving aside the fact that you can’t draw a parallel between Diablo 3’s and WoW’s gold (they are both called “gold” but there is no relationship between them), with time Diablo 3 will most likely circulate more gold than WoW. First, Diablo 3 is the future while WoW is in decline. Second, it will be much easier for people to make gold in D3 than in WoW, simply for the fact that it drops in large quantities from monsters. In WoW there are plenty of poor people who have barely managed to save 1,000 gold but in D3 you will make lots of gold as long as you keep playing the game.
Moving on to real money, of course D3 will make more than WoW, for the simple fact that real money doesn’t exist in WoW’s economy. The first cent made by someone on the Real Money Auction House (RMAH) will automatically surpass WoW.
Those who will make real money in D3 will, first of all, be the ones who choose to trade on the RMAH. There will be plenty of people who will stay away from the RMAH, whether on principle or because they don’t have money to spend on virtual items. But for those who will actively engage in real money trading, there are profits to be made.
For every transaction at the Auction house, Blizzard will make 65 cents.
Every auction sells for 15cent listing fee + 65 cent selling fee. If your auction is sold you’re refunded 15 cents, if not, you lose 15 cents. For every sold auction 65 cents goes to Blizzard’s pocket, for every non-sold auction 15 cents go to Blizzard’s pocket.
Let’s say that only 50% of the people will SELL ONLY 1 ITEM PER DAY (Most people will sell multiple items per day). Also, let’s say that 80% of the people will NOT SELL 3 items per day. Let’s use a very low-ball estimate of 8,000,000 active players (in my strong opinion):
(8,000,000 X 0.50 X 1 X 0.65) = $2,600,000 per day
(8,000,000 X 0.80 X 3 X 0.15) = $2,880,000 per day
= $5,480,000 per day
= $5,480,000 x 365 = $2,000,200,000 per year.
ATVI makes 4.4B in rev’s a year
With Diablo 3 alone, they could make more than 2 billion per year, assuming just 8M users.
Now assume that WoW loses half it’s subscription base to D3 players (will lose some, not this much).
2.5M * 5 * 12 = 150M 2.5M * 15 * 12 = 450M = $600M in revenue a year
Added to the D3 Revenues that’s over 2.6B in revenues. (ATVI is also offering a free copy of D3 with a year subscription purchase of WoW, driving revenues higher.)
The best part is: the margins on these revenues are pretty much nonexistent and none of these numbers include the amount of physical and digital copies of D3 that will be sold.
TTWO is calling for FY13 (March ’12-March ’13) estimates of $2.00 EPS. If this were true, it would have to be the case that every game published by TTWO is unprofitable, besides GTA V. There’s no doubt that GTA V is going to be big, but the question is “how big”?
Video game industry analysts estimate that GTA V will sell 15-18M copies in FY12. Taking the low-ball estimate, 15M copies of GTA V sold will generate at least $2.25 in incremental EPS.
Breaking it down:
To generate the $2.25 in incremental EPS we’ll apply another low ball estimate of 26% of earnings per each sale of GTA V.
Assume TTWO sells 15,000,000 copies of GTA V at $48 to retailers.
15,000,000 * 48 = 720,000,000M in Revenues
Let’s say out of that $720M in Revnues, TTWO takes home earnings of 26%.
720,000,000 * .26 = $187,200,000 in EBITDA.
Now divide this number by the number of shares outstanding to get the EPS for GTA V sales.
187,200,000 / 83,000,000 shares = $2.25 EPS
Now, and more importantly, let’s figure out how much an extra million copies of GTA V will generate in EBITDA.
1,000,000 copies * 48/copy = 48,000,000 in Revenues
48,000,000 * .26 = 12,480,000 in EBITDA
12,480,000 / 83,000,000 shares = $0.15 EPS.
For each million copies of GTA sold, TTWO earns 15 cents in EPS.
Now, let’s do some estimates on how many copies of GTA will sell and how that’ll affect EPS.
17M copies = $2.56EPS
19M copies = $2.86EPS
21M copies = $3.16EPS
My estimate is for 18M copies of GTA V to sell. Alone, this would account for $2.71 in incremental EPS from GTA V alone. When the company itself calls for an EPS of $2.00, might it be the case that they’re being a bit conservative? (Management has a history of being conservative)
GTA V will be released sometime between October-December, and will be a smash-hit. (Rockstar takes their time ala Blizzard, to make great games).
Also being released in FY13 for TTWO are the following titles:
Max Payne 3 (just got pushed back) BioShock: Infinite Spec Ops: The Line Borderlands 2 XCOM NBA 2K13
For TTWO to hit it’s target guidance of $2.00 EPS they’d have to do some heavy acquisitioning to offset the profits that these titles, along with GTA V, will generate.
So, the question then becomes—just how many titles of GTA V will TTWO sell?
Note:I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
So it was just brought to my attention that I still have a blog. Without further ado, I’ll begin my second entry:
(1/4/12 3:16PM EST).
Read a book.
From my own college experience, I found it highly difficult to pay attention in class or respect my teacher’s intelligence level. Simply put, it was hard for me to attend a lecture that I believed to be taught incorrectly, taught with no ambition, or taught without a degree of intelligence. Consequently, I had an average attendance rate somewhere below 30% (Sorry Dad!). And yeah, I got horrid grades in college. Don’t get me wrong; there were some classes I absolutely loved—pretty much any English or Philosophy course. This was unfortunate for me, considering I majored in Finance.
Because I found it impossible to read the tedious textbooks assigned to me in my Finance classes, I had to find the highway to knowledge elsewhere. I thirsted for true knowledge, not an “A”. I figured it fitting to find knowledge out of the place where knowledge is supposedly taught: books.
Words. Words. Words. One thirty minute trip on the subway in NYC provides you with objective evidence to how many physical words there are in the world. People magazine here. An iPad over there. Advertisements on the walls. Steinbeck in her hands. Words are gossip, technology, products, and literary genius. What you derive from words is knowledge, thoughts, and experiences. Knowledge of what you read. Personal thoughts on your newly-attained knowledge. And, experience from the act of reading, thinking, and acquiring knowledge. What you read is what you know and ultimately who you are.
Reading is something that people do or don’t. Some people do read. Some people don’t read. The simple fact of the matter is that it’s something you can do. More importantly, it’s something extremely easy to do. Unfortunately, it’s also something extremely easy not to do. It’s extremely easy to just flip on the tube after a day of work, school, or lethargy. It’s also extremely easy to read 15 pages of words per day. (It takes about 10-15 minutes.)
Think about it this way: if you were to read 15 pages a day, every day, for an entire year, you’d have read 5475 pages by the end of the year. 5475 pages equates to over 45 120-page books, over 2,737 2-page sports pieces, and over 5,474 1-page gossip columns. This is precisely where content comes into play. Does the ageless adage make sense? Is content really King? Yeah, I think so; or, they’d stop saying it.
This isn’t revolutionary. This is commonplace. As I said before, what you read—is what you know—is who you are. So why not turn off the Kardashians for 10 minutes, tune out of the ball game for 10 minutes, or wake-up for 10 minutes. Then, go ahead and read something with true intrinsic value that adds substance to your character. Easy to do; easy not to do.
I wrote my first analysis of an equity in the summer of 2008. I was unemployed (again) and hanging out poolside on my friend’s parents’ terrace located in a sheltered, bubbled suburb in the Bay Area, California. I knew nothing of life besides the internet, video games, technology, and females. Because I didn’t think it viable nor tangible to write upon the value of women in terms of cash, I wrote about the next best thing—Google. While rough around the edges, my thoughts on Google largely remain the same. From the free-million-dollar-portfolio-trading-site updown.com, here is my entry on Google, titled “GOOGLE OWNS THE INTERNET.”:
“Internet growth and long term advertising will only propel Google’s success to new heights of stock godliness. Factually, Google accounts for 6 out of 7 internet searches and 80% of all referrals to websites. Not only does Google own the search and information aspects of the internet, the company is responsible for 90% of all those little annoying advertizements one sees on any given website visited. Atop of all this, Google has announced a deal with Yahoo, the 2nd leading search engine on the internet. In the deal, Yahoo plans to farm out most of it’s search advertizing Google, strengthening Google’s steel grip on its search competition. Enough with the digital, Google is taking a tangible approach on its future. What lies ahead is the gPhone that features Google’s own open source operating system for mobile devices, Android. This revolutionary platform will further Google’s advertizing dominance and put Apple’s iPhone software to shame. With new innovative ideas and a committed company core, one should not blink twice when investing in Google’s hefty price tag: it’s worth it, Google owns the internet!”
When writing this, Google (GOOG) was trading at $463.29 (August 25, 2008). I set a shockingly hilarious 3-month Price Target of $520.00. I knew nothing of finance, the markets, nor how a company is run; and it showed. 3 months later, Google was trading at a paltry $292.00. Had I made an actual investment, I would have lost 63% Return on Investment, a shit-ton of money, and a boat-load of self-confidence. Thank God, I only lost $630,000 of play money.
Today, Google is one of the elite companies in the world among the ranks of Apple and Microsoft. They retain talent, produce valuable products, and the top-management consists of some of the most innovative thinkers of my generation. As of 3:03PM EST, Google is trading at $629.31, a premium of 36% to the price I recommended it at. Google has a Market Capitalization (MCAP) of $204 Billion dollars with over $30 Billion in cash to boot. Never would I say that I was right. Google has traded as low as $262 and was looked at as a takeover target many times; however, there’s something to be said about what I saw in the company over three years ago.
Looking back on my first analysis ever, I’ve come to a key take-away. It’s not revolutionary nor a new way of thinking; it’s just the right way to invest.
Invest in what you know. Invest in your competencies, your strengths. These are highly advisable strategies to any investor; yet, rarely traded upon. More and more, it’s the case that people are trading on a whim, taking huge gambles in order to reap a huge return. The problem with this strategy is that it’s a form of trading rather than investing; and, more often than not it’s highly unsustainable. Ask the famous Hedge Fund Billionaire, John Paulson, how he did across all 15+ of his funds this year. Not a single one was up, including his Gold fund (GLD was up 10% in 2011, and traded as high as 34%). This isn’t a knock on the brilliant Paulson, rather a knock on the size of his fund and the leverage he used to become the famous Hedge Fund manager he is today.
It’s time that people start investing on fundamentals. Trading isn’t realistic anymore; technicals can only take you so far. Get real, sack up, and do some goddamn research. Invest on what you know, not what you think you know. Not only in the stock market, but also in life, the only way to come into possession of true knowledge and the consequential expertise in that field of knowledge is by employing the following steps: reflecting upon what you’re already knowledgable about, choosing your battles wisely, and commencing a full-fledged conquest by means of some simple hard work. Ambition is all we have in life-capitalize on it.
The goal of this blog is to provide a twist and a turn on the traditional way U.S. Securities are observed, written about, and analyzed. Occasionally, I’ll throw in blurps about my disgust with corporate greed, our politcal system, and the ignorance of the masses. It will be written from the perspective of a callous, intelligent, cynical, ambitious, young-son 23 year-old. Because, frankly, that’s who I am.
Disclaimer: I will abide by the laws governing an employee of a FINRA-registered employer.
