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Activision Blizzard’s (ATVI - Snapshot Report) publishing division recently announced that according to data available from market research firm NPD group, the Skylanders franchise has crossed the coveted $500 million milestone in retail sales, much faster than any other kids’ game currently in the market.

Skylanders toy sales also outperformed the popular toy lines of Beyblades, WWE and Star Wars, according to company estimates and supported by data available from the NPD group and Gfk Charttrack. According to NPD, Skylanders Giants, a sequel to the Skylanders Spyro’s Adventure earned more than $195.0 million in 2012. Moreover, the Skylanders Giants movie was one of the best kids’ films in the holiday season, as per boxofficemojo.com.

Apart from winning a number of awards, the game also featured in the “Holiday Hot Toy List” of Toys“R”Us. We believe that the popularity of the Skylanders franchise lies in the novelty of the concept of bringing toys to life. Moreover, Activision’s timely initiative of rolling out a mobile version of Skylanders Cloud Patrol for Apple’s (AAPL - Analyst Report) iTunes App store and Amazon’s (AMZN - Analyst Report) Kindle Fire also enhanced its popularity in our view.

The success of Skylanders comes at an important time for Activision. Of late, the company has tasted success with its blockbuster first person shooter (“FPS”) game Call of Duty: Black Ops 2, which topped the NPD’s top 2012 games list.

The strong performance from Call of Duty coupled with the success of Skylanders is expected to have driven Activision’s top-line growth for 2012. Currently, Activision expects sales of $2.41 billion for the fourth quarter and $4.81 billion for the full year.

Nevertheless, we note that Call of Duty is an aging property. Moreover, we believe that the shooter gaming market may face significant decline in sales following the Connecticut school shooting incident that left 28 people (including 20 children) dead on December 15, 2012. The tragic incident has brought shooting franchises such as Call of Duty and Electronic Arts’ (EA - Analyst Report) Medal of Honor under strict scrutiny for using weapons and promoting violence through games.

In such a scenario, we believe that franchises such as Skylanders, which is mainly targeted at kids, has significant opportunity to grab market share going forward. Skylanders not only diversifies Activision’s gaming portfolio but also expands its revenue earning source from the retail sales of Skylander toys.

Activision is expected to benefit from its strong product pipeline in 2013. In addition to Skylanders, games such as 007 Legends, Cabela’s Dangerous Hunts 2013, Cabela’s Hunting Expeditions and Transformers Prime will be incrementally beneficial for the company going forward.

However, continued softness in the video game industry, sluggish macroeconomic conditions and Activision’s limited presence in the mobile and social gaming segment remain headwinds going forward. Thus, we remain Neutral over the long term (6-12 months).

Currently, Activision has a Zacks Rank #3 (Hold).

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