It has not been a good August for Activision Blizzard (NASDAQ: ATVI). First, Activision earnings came out including lower revenue and poor guidance. Then a July video game sales report showed trouble again, with industry-wide sales down 1% on the month. To top it off, last week’s market volatility continued to drag down ATVI stock. That has left Activision with a nearly -8% loss since the first of August.
The declines in ATVI stock has some investors wondering if now is the time to buy in to ATVI stock at the bottom, in the hopes that the video game giant will see a big rebound. But those investors better think twice before sticking another quarter in the slot of this video game stock. A look at the upcoming publishing schedule for Activision Blizzard shows a tired list of sequels that simply cannot keep pace with past sales as long as consumer spending remains weak.
The problems were obvious in Activision’s latest earnings report. Revenue fell nearly 7% percent during the second quarter, dropping from $1.04 billion to $967 million. The company’s healthy, certainly, with profits jumping by 12%. However, these were due almost wholly to lowered costs. Investors read between the lines and pushed shares down about -6% in one trading session after the poor revenue numbers and weak full-year guidance from Activision’s earnings report.
There’s a reason that the outlook was weak for ATVI sales. Though Activision has a fairly crowded slate of releases throughout the rest of the fiscal year, the majority are sequels to existing titles that are simply looking to squeeze more cash out of gamers instead of tapping into sales with an exciting new title.
That’s not to say there won’t be the potential for some fireworks. Starcraft II, a much-anticipated sequel to a game released in 1998, hit the market on July 27 and shipped 1.5 million copies within two days. Lazard Capital analysts predict that Starcraft II could ship 6.5 million copies by the end of fiscal 2010. And Blizzard’s other major property, the 11.5-million-subscriber-strong online role-playing game World of Warcraft, will also see an entry later this year. The last series expansion, Wrath of the Lich King, sold 2.8 million within 48 hours when it released in 2008 — in addition to bringing back lapsed players more than happy to pay a $14.99 monthly fee.
But sequels rarely eclipse the success of original titles, and Activision is essentially agreeing to recycle old successes instead of taking risks and spending money to develop and promote a new title. ATVI will also release the latest entry in its popular Call of Duty franchise, and could see sales backslide considerably. While last year’s Call of Duty: Modern Warfare 2 has sold over 20 million copies since it released in November, Call of Duty: Black Ops should not perform nearly as well. Black Ops developer Treyarch’s previous effort, 2008’s Call of Duty: World at War, sold just 11 million copies in its first six months, half of Modern Warfare 2’s sales over the same period. Additionally, ATVI continues to over-saturate the market with its Guitar Hero franchise as well. ATVI will release two games with the Guitar Hero branding this fall despite steadily declining sales over the past two years.
Some of these titles could give Activision shares a lift over the holiday season, but ATVI stock will not see the same success it did in holiday 2007 or 2009 simply because consumers aren’t ready to start spending again. What’s more, the big story this fall will be the Microsoft (NASDSAQ: MSFT) Kinect and the Sony (NYSE: SNE) Move; new motion controllers that could either spur a video game resurgence or wind up colossal and expensive flops. ATVI has no products prepared for either device, clearly taking a defensive stance on the new products.
But that defensive position could prove fatal. Not just because the Microsoft Kinect is already sparking a huge buzz akin to Nintendo (PINK: NTDOY) with its Wii in 2006, but because it shows Activision is a company that is trading creativity for safe, consistent sales. And investors know after the latest earnings report, those sales have been consistently disappointing.
It’s almost certain that Activision will perform below expectations this fall due to this uncreative approach, and there’s no guarantee holiday earnings that roll in during Q1 2011 will be much better. While analysts predict prices from $13 all the way to $16, chances are that ATVI will continue to face an uphill battle as long as its suite of video games remains stale and it sticks with the same safe titles.
Of course, if either Starcraft or Warcraft see dramatic sales, either of these games could single-handedly revive Activision shares. And if consumer spending turns around, sales could start a steady march back to where they were before the recession. But amid the market volatility and tight budgets of the American public, neither seems particularly likely.
As of this writing, Anthony Agnello did not own a position in Activision stock.
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