Few stocks have been hit as hard by the tech wreck as Activision Blizzard (NASDAQ:ATVI). The value of Activision stock has fallen nearly in half, from $83 per share at the start of October to $48 this morning. ATVI stock is now at levels not seen since February 2017.
But this is not the time to hit the buy button on Activision stock. For one thing, this market is not enthusiastic about speculative makers of entertainment products.
More importantly, ATVI really isn’t that much different from what it was in February 2017, and that should be far more worrying to investors.
An Epic Fall
In February 2017, ATVI was coming off a year in which it averaged $1.65 billion of revenue per quarter. The company’s revenue for the third quarter of 2018 was $1.5 billion. It was the company’s fourth straight quarter of falling revenue, and its Q3 profits tumbled by 50% versus the March quarter.
An online adventure game launched in 2017, Fortnite is the creation of privately-held Epic Games. Tencent Holdings (OTCMKTS:TCEHY) took a 40% stake in Epic back in 2012, as the “games-as-a-service” model was launching
The free-to-play Fortnite drew 125 million players in less than a year. Despite being free, it generated $318 million of revenue in May, a month during which ATVI brought in about $550 million from its whole catalog.
Saving Activision Blizzard
Despite this headwind, there are analysts who think Activision stock can come back. There is hope for the company’s flagship game, Call of Duty: Black Ops 4, there is the growing phenomenon of eSports, with all its revenue offshoots, and there is the continuing growth of the Chinese market.
But Activision stock is facing other problems. There is growing tension between Activision and Blizzard, the two companies which merged to make the current outfit in 2007.Blizzard created World of Warcraft and Overwatch, both key franchises, and its CEO recently left ATVI.
Gaming is a business that can turn on a dime, not only in terms of titles but in terms of where and how it takes place. ATVI was huge when its Candy Crush, often played on tablets, was the most popular game, and Call of Duty requires both an online connection and PC-client software. Featuring an adventure game that is free to play from any device without start-up software, or an expensive graphics card, Epic caught ATVI flat-footed and meaningfully hurt Activision stock.
The switch to pure online play has also damaged Activision Blizzard’s channel, where kits for Call of Duty are sold. Activision Blizzard said it had 345 million users across all its titles last month, but that’s down from 384 million a year ago.
The Bottom Line on Activision Stock
Gaming is a huge industry, but it remains highly speculative, dependent not only on the longevity of a few key titles and the talent of a few key people, but on the stability of platforms whose popularity can turn on a dime.
Epic’s innovation won’t be the last word in this business. Something new will come around, and it might come from Activision Blizzard or some kid working right now in his parents’ basement.
The problem is that this uncertainty makes it difficult to invest in the sector.
If you buy ATVI stock now, you’re betting it can quickly come up with an answer to the Fortnite problem, and you’re paying 66 times Activision’s current earnings for the privilege. When sure things are selling at cheap valuations, who wants to make that deal?
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.