Gaming stocks are deeply out of favor these days. The Street’s lack of enthusiasm for video game makers, combined with the market’s recent weakness, caused gaming stocks to drop sharply over the last couple of months. That trend puts the hot gaming sector at odds with the performance of gaming stocks, including Activision Blizzard, Inc. (NASDAQ: ATVI).
ATVI is the most interesting name in the sector The company’s fourth-quarter bookings guidance came in below expectations, sending Activision Blizzard stock from $65 earlier this month to around $50 recently. The decline of Activision stock came after Activision Blizzard launched the newest version of its “Call of Duty” series, entitled Call of Duty: Black Ops 4, in October. The new game is sure to generate plenty of revenue for the company.
Activision Blizzard stock is down around 40% from its 52-week highs. Investors were worried about the company’s near-term prospects ahead of its earnings, which were unveiled on Nov. 8. Prior to the report, ATVI reported that the new Call of Duty title had generated a decent but not great $500 million of revenue during the weekend following its launch. The game’s revenue came in below Activision’s Call Of Duty: Black Ops 2, which brought in $500 million in the first 24 hours following its launch. That sales of Call of Duty: Black Ops 4 in the three days following its launch set new franchise records in other areas failed to impress investors. Specifically, the game set records for average hours per player, total hours played, and most combined players.
ATVI’s Q3 Results
During the Q3 earnings call, ATVI highlighted the other games that it expects to sustain its top-line growth going forward. In addition to Call of Duty: Black Ops 4, Activision Blizzard released World of Warcraft: Battle for Azeroth, and its King division launched Candy Crush Friends Saga. In the third quarter, ATVI’s net bookings exceeded $4 billion. Meanwhile, its live operations will continue to boost its growth.
Since Activision stock is doing so poorly, investors should carefully examine the company’s performance last quarter. Destiny 2: Forsaken underperformed the company’s expectations in the period, contributing to the operating profit of the Blizzard segment declining to $112 million. Conversely, Warcraft’s success is the reason that Blizzard’s revenue jumped 20% year-over-year.
Q4 Expectations
ATVI stock will benefit from major content releases this quarter, but analysts’ consensus estimates are still disappointing. Specifically, the company’s net revenue is expected to come in at $2.236 billion, including a GAAP deferral of $812 million for product cost, game operations, and distribution expenses. It’s expected to report EPS of 43 cents. Activision stock still trades at 19.3 times the company’s expected 2018 EPS of $2.61. So, despite the stock’s fall, value investors may not want to buy ATVI at this time.
Solid Business
Activision Blizzard’s stock has done well in recent years because of the consistent success of its major games. Call of Duty can continue to generate more revenue for the company for several quarters, as early data indicates that players will be interested in the game for a longer time, compared with previous versions.
In the mobile space, King’s Candy Crush title has attracted many casual gamers. These players are unlikely to disappear, and ATVI’s monetization of them could increase. Some key metrics suggest that the Candy Crush franchise will do well in 2019. The unit, however, is not standing still. It will actively invest in other games internally and through partnerships, lowering risks of launching new titles and cutting development costs.
The Bottom Line on ATVI
ATVI only has a few blockbuster games. But the company is developing other titles that have meaningful potential. If the company comes up with another hit, Activision Blizzard stock will respond by bottoming out and revisiting its past highs.
As of this writing, the author does not own shares in any of the companies mentioned.
