Is Activision Stock Worth a Buy Ahead of Earnings?

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ATVI stock - Is Activision Stock Worth a Buy Ahead of Earnings?

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In 2018 we have had fears of rising bond yields, tariff wars and, most recently, the uprising of the U.S. Federal Reserve’s defiant mode. So it’s no surprise that Activision Blizzard (NASDAQ:ATVI), while still positive this year, is well off its highs.

But looking at the weekly chart for ATVI stock, it’s a completely different story.

ATVI stock is up 200% since the 2015 breakout. Along the way it hasn’t been all smooth sailing. The stock has had five 20% draw-downs, including this one that we’re still in. It’s important to note that three of these dips occurred since March of this year, but the overall trajectories are still incredibly positive.

So, in theory, these dips are buying opportunities for Activision investors. This week, Wall Street will have a chance to trade it in just a few days when ATVI reports earnings, Nov. 8.

The short-term reaction to earnings is always binary. Even if we knew the actual numbers the company will deliver, we couldn’t guess how investors will react at the open. Looking back at the last four events, traders sold Activison stock on the headline, but it eventually recovered and set new highs. This further supports the thesis that dip in Activision stock are buying opportunities.

There are extrinsic risks. The stock market, despite of all the uncertainties that loom, is generally still near an all-time high. While this is encouraging, it is also an added risk to ATVI stock. If this week’s elections or Fed events cause further market turmoil, ATVI stock will also suffer regardless of its earnings.

In other words, any new position in Activision stock should be done in tranches. Experience taught me to expect the unexpected regardless of how sure I am of my thesis, and this current situation doesn’t allow investors to trade with conviction.

Even with all the turmoil this year, ATVI stock is still up 13% year-to-date, which is close to Take-Two’s (NASDAQ:TTWO) performance and much better than the 17% loss for Electronic Arts (NASDAQ:EA). So it’s a good balance of stock performance to value within the sector.

Still, investors looking to buy ATVI shares ahead of earnings still need to consider a few variables.

For example, the competition for Activision is fierce. Esports is all the rage, and although the future here is bright, nothing is guaranteed. Gamers tend to be very dedicated to their choices, but once they flip from one trend to another, it lasts a while. Thus, the threat to ATVI is real, but its management team has the experience to endure any potential hardships.

Moreover, ATVI stock is not cheap. It sells at a price-to-earnings ratio of 46, which means there’s plenty of froth to shed in a swoon. Compare this to say Apple (NASDAQ:AAPL) at a P/E of 18 or Alphabet (NASDAQ:GOOG) NASDAQ:GOOGL) at a P/E of 26. But within its sector, ATVI is in the middle of the range.

Bottom Line on ATVI Stock

Analysts agree that ATVI stock has better days ahead. They mostly rate it as a “buy” and it’s still trading well below analysts’ average price target. Barclays even upgraded it recently coming into the earnings, which further demonstrates Wall Street’s conviction that the company will have a good story to tell this week.

While this is also true for most of the stock ratings within the space, ATVI has the best balance of analyst ratings and current-price-to-price-target. Meaning, there should be a realistic upside opportunity if all the homework on the Wall Street is correct for Activision stock.

On Monday, ATVI stock was under pressure, but is has technical support below, so I will be watching the trend of higher lows for the short term as confirmation.

Ultimately, the Activision earnings report creates a unique opportunity for investors looking to buy the stock. Although the opportunity is not without risk, unless we get a market-wide correction, the stock’s upside trend will continue beyond this week’s uncertainties.

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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/is-activision-stock-worth-a-buy-ahead-of-earnings/.

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