On Thursday after the market closes, Activision Blizzard, Inc. (NASDAQ:ATVI) will report its first-quarter results. The Wall Street consensus is calling for revenues to hit $1.32 billion and earnings to come to 35 cents a share. And yes, the company has a pretty good track record when it comes to beating the numbers.
Yet this time around investors don’t seem to care. Since early March, Activision stock has gone from $78 to $68. Actually, the sell-off has impacted other top game operators like Electronic Arts Inc. (NASDAQ:EA) and Take-Two Interactive Software (NASDAQ:TTWO).
Of course, the main catalyst for this is Epic Games Inc.’s smash hit, Fortnite. The game, which launched in July, went into hyperdrive in January — attracting a whopping 40 million players. The game is so popular that it has gained the attention of hip music star Drake.
Fortnite is an interesting meld of fantasy and first-person shooting scenarios. The game also has a free version, which allows for more viral growth. This is definitely unique for a console game. Note that Fortnite is available on Sony Corp’s (ADR) (NYSE:SNE) PlayStation platform as well as PCs.
But perhaps the killer feature — so to speak — is the “battle royale” mode, in which all the players fight to the bitter end. It’s often referred to as “The Hunger Games.”
ATVI Stock v. Fortnite
For Activision stock, the nagging fear is that the company’s franchises like Call of Duty will come under pressure. This would likely mean a hit to revenues.
Yet I think this seems to be an overreaction – and could present an opportunity for investors who are looking at Activision stock. First of all, hit games are tough to sustain. Players want more and more features, which can be tough to gin up. There is also the potential risk that a game will ultimately turn out to be a fad that quickly fizzles.
In the meantime, ATVI will not sit still. The company has been battle-tested over the decades, adapting to harsh competitive environments. In other words, it would not be a surprise to see ATVI start incorporating Fortnite-style features in its own titles. If so, this will likely blunt some of the impact.
Besides, ATVI has many powerful advantages, such as:
- There are about 500 million monthly active users (MAUs).
- The company has eight $1 billion-plus franchises.
- ATVI’s games have deep engagement, with the average time spent per day at 50 minutes.
- There are customers across 196 countries.
What’s more, ATVI has the advantage of significant cash flows, which allow for ongoing development and innovation. Last year, the cash flows from operations came to about $2.3 billion.
Bottom Line on Activision Stock
For the long-term, Activision stock is positioned nicely to benefit from the eSports business as well. This involves people who watch top-notch gamers compete.
While eSports is still in the early phases, ATVI has already made significant progress. The company has launched the Overwatch League, which has 12 teams and the viewership has reached over 10 million.
Something else: The market opportunity is likely to be massive. According to the 2017 Global Esports Market Report, the brand spending is expected to jump from $517 million this year to $1.5 billion by 2020.
Granted, the recent success of Fortnite will probably have some impact on ATVI. But again, the company is in a strong position to deal with this. So for investors looking at ATVI stock right now, this should be a good entry point.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
