Shares of Activision Blizzard, Inc. (NASDAQ:ATVI) have been a total beast in 2017, climbing a whopping 46.8% so far. Over the past year, ATVI stock is up even more, climbing almost 55%. Why has it done so well?
Activision Blizzard’s new Call of Duty looks pretty intense and a new Destiny game is due later this year. World of Warcraft and other games continue to contribute to the mighty in-game purchases and subscription revenues. All three major franchises continue to drive results for the company.
Last quarter, ATVI reported earnings of 33 cents per share, crushing analysts estimates for 7 cents per share. So will Activision Blizzard be able to do that again when it reports on May 4 after the close?
A Look Ahead at Activision Blizzard
For the current quarter, analysts expect ATVI to earn 21 cents per share on $1.09 billion in revenue. If correct, this would represent an 8.7% decline in earnings, despite a near-20% increase in sales.
For the full-year, estimates call for an 11.4% decline in earnings-per-share and a 2.7% decline in sales. Next year is much more optimistic though, with analysts looking for 21.5% growth in earnings on a near-10% increase in sales.
As great as the company has been, it might be time for investors to pump the brakes. Despite the excellent results the past quarter and calls for strong revenue growth this quarter, at what point is it priced into the stock?
Expected EPS growth of 21.5% next year is impressive, but an EPS and revenue decline this year is nothing to cheer about. Unfortunately, we’re only entering Activision’s fiscal first quarter, which means this year should be down from the prior year.
That’s what doesn’t get me excited about buying something like ATVI stock with a forward price-to-earnings ratio of 22.4. Trading at 42 times last year’s earnings and 6 times sales isn’t too attractive, either.
On the plus side, Activision Blizzard’s prior Q1 guidance calls for 25 cents in EPS on $1.55 billion in sales — both above current Q1 estimates. Unfortunately, its full-year guidance of $1.70 in EPS and $6 billion in sales is below Street estimates of $1.92 in EPS on $6.42 billion in revenue. This will make upside surprises after Q1 more difficult.
Trading ATVI Stock
The stock’s valuation isn’t all that attractive and the stock is up big on the year. That makes it one to avoid, right? If a trader is approaching Activision Blizzard for the first time on Wednesday, it would be hard for me to say they should buy it.
After a strong holiday, ATVI stock rocketed higher in February. This put the name on many investors’ radar. The move also put the stock above $45, a level of resistance during the fall. Activision Blizzard has climbed far above that level now though, currently trading near $53.
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For investors who have been long, perhaps they would want to consider locking in some gains. They could also consider selling upside calls against their position and/or purchasing some downside puts for protection.
All that said, I wouldn’t short the stock with both hands. Despite the big rally in ATVI stock and its suspect valuation, doesn’t mean it can’t go higher. A look at the charts suggests a modest pullback could be in the works though.
With a relative strength index (RSI) of 80 (purple circle), it suggests the stock could be exhausting itself. Unfortunately, momentum, as indicated by the MACD measurement at the bottom of the chart, is picking up pace and doesn’t look ready to stop. As you can see, there are a lot of conflicting signals with Activision Blizzard stock.
The best case scenario for longs is a muted to slightly higher open on Thursday. On the downside though, a pullback to somewhere between the 50-day and 10-day moving average seems most likely.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
