Activision Blizzard (NASDAQ:ATVI) stock seemingly has all the ingredients needed to charge higher despite the broader market weakness. Obviously, video games provide a viable, proven path to success. The sector has infiltrated popular culture, achieving a level of acceptance that was unheard of a generation ago. That situation alone provides a substantial tailwind for ATVI stock.
Another conspicuous factor that will help the video-game maker is the international market. Gaming has become a global phenomenon, offering a lucrative channel for sector participants. Bear in mind that this is a proven concept. Sony (NYSE:SNE) could very well be bankrupt today if it didn’t have PlayStation carrying the company through the lean years.
But Activision Blizzard stock has dropped much more than Sony during the most recent market selloff. From the end of September to now, Sony has retreated almost 17%. Conversely, ATVI has plummeted over 43% during the same period. The natural question is: What gives?
InvestorPlace’s Bret Kenwell looked into the causes of the plunge of Activision stock. Kenwell cited various headwinds, including gaming-chip demand declines that have negatively impacted Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). Additionally, he mentioned concerns surrounding Activision’s flagship franchise, Call of Duty. If the popularity of the franchise fades, ATVI stock would almost certainly get killed.
But I must go back to the oft-cited headwind, Fortnite. As Kenwell mentioned, Fortnite is a free online video game, which of course hurts Activision Blizzard stock. Even more alarming for owners of ATVI stock is Fortnite’s in-app purchases. They’ve generated more than $1 billion, proving that the game has superior user engagement.
However, the most important factor here is asymmetry. Today, you no longer have to be an industry stalwart to succeed in the gaming world. This concept surely has caused investors to abandon ATVI stock at a record clip.
Fortnite Mania Is Easing
Typically, a company that has lost nearly half its market value in less than three months has severe fundamental problems. But when it comes to Activision Blizzard stock, I believe that investors are panicking more because of the current bear market than the company’s fundamentals. In the bigger picture, ATVI stock remains a solid pick.
Earlier this year, the media inundated us with stories about Fortnite taking billions of market value from top video-game manufacturers. When the newcomer first debuted, no one could get enough of it. Its revenue growth was simply out of this world, causing competitors to introduce their own games utilizing the “battle royale” style that has made Fortnite so popular.
While the game still resonates with fans, we have evidence that the mania is finally declining. In May of this year, Fortnite’s month-over-month revenue growth slipped dramatically to 7.4%. According to CNBC, the game’s revenue growth fell to just 2% in June.
If Fortnite was a publicly-traded asset, I would gladly sell it into its peak strength. On the flipside, I’d buy ATVI stock, hoping that it has hit its low point.
ATVI bears might counter that Fortnite has recently attracted 200 million players, with 8.3 million playing concurrently. Both metrics represent huge surges versus January’s levels. Its creator, Epic Games, has also leveraged the game’s success across multiple channels, including licensing and merchandising.
These are all positive signs for Epic, and they are worrying data points for owners of ATVI stock. But I’d also argue that Epic’s return-on-investment from active users has sunk to unattractive levels, while Fortnite has lost its asymmetric advantage.
Risky Contrarian Opportunity for ATVI Stock
Unlike Epic, ATVI’s key franchises have a history of succeeding over the long-term. Yet at this point, Activision Blizzard stock has been victimized by hysteria over a one-hit wonder.
I understand that this is not an entirely fair characterization of Epic and its Fortnite goldmine. Nevertheless, Fortnite has enjoyed a banner year. ATVI, through its Call of Duty franchise, has enjoyed several banner years. Call of Duty is a mainstay, while Fortnite has benefited from a short period of mania.
As awful as the plunge of Activision stock has been, I’m confident that it will work through its funky phase. Undoubtedly, the process will take time. In addition, the broader market weakness has everyone worried. In these circumstances, virtually all stocks will suffer at least some turbulence.
But my biggest point is that investors shouldn’t perceive ATVI stock’s bearish performance as a signal of fundamental weakness. All the things that you liked about Activision before are still in place. The Street just isn’t thinking clearly right now, which is unfortunately natural, considering the market’s turbulence.
As of this writing, Josh Enomoto is long SNE.