Seemingly out of nowhere, the video game industry is no longer a great place to invest. One of the biggest names in the sector, Activision Blizzard, Inc. (NASDAQ:ATVI), suffered tremendously on Tuesday, shedding 5.4%. Since the close of March 9, Activision stock has evaporated an uncharacteristic 15%.
It doesn’t get any easier looking at ATVI’s rivals. Key competitor Electronic Arts Inc. (NASDAQ:EA) is down 5.1%, while Take-Two Interactive Software, Inc (NASDAQ:TTWO) lost 4.9%. Even mobile-gaming specialists Zynga Inc (NASDAQ:ZNGA) and Glu Mobile Inc. (NASDAQ:GLUU) weren’t safe from the bearish onslaught. Then again, very few names emerged from the red ink unscathed.
That’s not to say that we should give ATVI stock a pass. In recent days, we’re just getting a glimpse as to how Activision’s previously unassailable moat is now shockingly vulnerable. I speak of course about the record-shattering popularity of the mobile game Fortnite.
A shooting game that appeals to a broader audience, seemingly everyone is talking about Fortnite, and importantly, engaging its community. In fact, Fortnite has become so popular that 628,000 people tuned in just to watch popstar Drake play with his gamer buddies. I can understand being star-struck, but such fandom takes this concept to an entirely new level.
It’s not just the competitive pressure that Fortnite imposes. Our own Vince Martin recently argued that ATVI is too dependent on its legacy franchises. He further asserts that these franchises, such as the popular Call of Duty series, has limited growth prospects. Thus, if Fortnite creator Epic Games can steal away market share, that would spell big trouble for Activision stock.
Granted, the technical chart for ATVI stock is ugly. However, I also don’t think investors should overreact to this upstart challenge.
Activision Stock Has a Proven Formula
While not taking anything away from Epic Games’ epic release, we should note that it’s free to download. Sure, the manufacturer is raking in the dough with in-app purchases, but it’s a risky business model. Plus, the engagement numbers are a bit skewed because of the “price.”
Some analysts have taken the approach that Epic Games is the hunter, and Activision stock is the prey. Respectfully, I disagree. Yes, Epic can steal away market share from ATVI, but I think the opposite is more likely. That’s the argument research firm Piper Jaffray has made, and they have a strong point.
Fortnite’s defining hallmark is its “battle royale” mode. It’s basically what you think it is: a no-holds barred fight to the finish. Up to 100 players can compete in any one game, and whoever is alive after the melee is the winner. If indeed that’s what makes this game tick, you can bet ATVI will be all over it.
Aside from the underlining company’s ability to replicate its competitor’s success, don’t forget that a proven formula backs Activision stock. The Call of Duty series, while old, is still one of the most popular franchises in gaming history. Moreover, in the constantly changing consumer electronics landscape, millions are still opening up their wallets for these “legacy” games.
Starting from the original Call of Duty released in 2003, Activision has enjoyed unprecedented success from this single franchise. Their early titles focused on the World War II theme, but they gained exponential popularity with their “Modern Warfare” theme.
Now, they’re back to World War II with their latest release, and it’s huge. In less than two months, Call of Duty: World War II hauled in $1 billion in sales.
Go With the Established Name
I understand the hesitation of buying ATVI stock, especially at this juncture. Outside of Call of Duty, it’s difficult to name other Activision games off the bat.
That said, ATVI has a proven franchise that goes back 15 years. Aside from Nintendo Co., Ltd (ADR)’s (OTCMKTS:NTDOY) Super Mario Bros. franchise, very few games have this much social cache. Therefore, I don’t find the dependency issue as a critical problem.
What is a problem, though, is the current market dynamics. With so many variables — trade wars, dollar weakness, monetary policy — it’s very difficult to make sense of it all. That doesn’t have anything to do with Activision stock, except that most names fall in a broader corrective phase.
Once the dust settles, though, you should keep your eyes on ATVI stock. Video gaming is a major, multi-billion dollar industry, and it’s only getting better from here. Furthermore, Activision is a lot stronger and resilient than you might think.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.