Amid the vast technology sphere, the video game segment is usually a no-brainer. Worldwide growth and mainstream acceptance have fueled gaming developers and publishers like Activision Blizzard (NASDAQ:ATVI). Unfortunately, Activision stock received a hammering due to competitive threats, disappointing revenues and broader market weaknesses.
Things got even worse for the gaming giant earlier this month. Fears that management had no real answer for the free-to-play (FTP) Fortnite rattled ATVI stock. Moreover, competitors like Take-Two (NASDAQ:TTWO) suffered sharp volatility during this time despite posting relatively strong results.
Additionally, the latest DLC (downloadable content) expansion from Activision’s prized franchise, Destiny, failed to live up to expectations. This, from Activision chief operating officer, Coddy Johnson:
“We have not yet seen the full core re-engage in Destiny, which has kind of led to the underpeformance against our expectations to date. Some players we think are still in wait-and-see mode. So when you’re in, you’re deeply engaged. If you’re not, we’re hoping now’s the time to bring players back in and win them back.”
While this latest disappointment played a role in Bungie’s split with Activision, the two companies have had bad blood for years. It was reported that Bungie employees “cheered and popped champagne.” Now game developer Bungie gets to keep Destiny. While the fallout wasn’t surprising considering the years of tension, it leaves Activision stock with a critical content gap.
Besides these headwinds, we haven’t yet discussed the category five hurricane. In a rumor that was later confirmed, ATVI will cut 775 jobs, or 8% of its workforce. Typically, companies don’t announce massive layoffs following a record revenue-generating year. However, disappointments have sadly become the norm for ATVI stock.
That said, embattled shareholders and speculators saw some reason for optimism. Despite reporting mixed results for its fourth-quarter fiscal 2018 earnings report beating on earnings per share but missing on revenue — Activision stock gained 3% on Tuesday’s after-hours session, and is still trading 3% higher going into the open.
Still, discount-diving ATVI has substantial risks. While the earnings print was okay, the company’s guidance was decidedly awful. For both the upcoming Q1 and full-year 2019, management badly undercut analysts’ expectations.
Can ATVI stock break out of its rut, or is the gaming giant merely setting up a bull trap? Here are my three main takeaways:
Layoffs Potentially Streamline Activision Stock
In business, we have two types of layoffs: productive and unproductive. The former is typically a response to a new, challenging environment. The latter usually stems from desperation as management attempts to demonstrate positive metrics on paper.
Regarding the recent ATVI layoffs, we have confidence that we’re dealing with the productive variety. For one thing, you can just look at the charts. Leading to the Q4 2018 disclosure and after it, Activision stock bumped up significantly.
Furthermore, let’s consider the details. Activision’s restructuring plans won’t impact development for new games. Instead, the job cuts will only impact “non-development teams and support staff.”
Given the wake-up call that the industry received over the past several months, it’s unnecessary to keep the drag. In lieu of having a well-stocked administrative department, management promised to focus on live services, esports and advertising.
As our own Laura Hoy points out, esports represents a “bright spot” for Activision stock, especially the company’s Overwatch league. She writes:
Not only has Overwatch been wildly popular, but the esports sector looks poised to continue growing exponentially. Some even believe that the genre will eventually grow to become a part of America’s collegiate sports. So far, the growth runway for esports games looks impressive and as long as Overwatch is able to continue drawing in new users and holding on to players, it could be a growth engine for ATVI stock.
No one likes layoffs. However, gaming companies have become complacent in addressing their consumer base. This is a painful but much-needed move.
Easy Answer to Fortnite
Whenever you have a discussion about video game stocks, you can’t avoid talking about Fortnite. Admittedly, I underestimated both the popularity and longevity of this family-friendly shooter game. Nevertheless, every product, even a juggernaut like Fortnite, has vulnerabilities.
Primarily, the gaming phenomenon isn’t that unique. Yes, it features a “battle royale” mode that everyone went nuts over. But even if that concept originated from Fortnite (it didn’t), it isn’t enough to construct a competitive firewall.
We’re not talking about compelling storylines and characters, attributes that game developers have considerable difficulty perfecting. Nor are we discussing lucrative licensing rights that are virtually impossible to overcome. Instead, we’re squabbling over a gameplay mode.
I concede that up until recently, the major gaming companies failed to dent Fortnite’s armor. However, Electronic Arts (NASDAQ:EA) may have fired the first meaningful shot. Just recently, EA released its own FTP game called Apex Legends. Early indications suggest exceptionally positive feedback. Impressively, Apex convinced a few high-profile Fortnite advocates to jump ship towards the possibly new phenomenon.
Of course, if that’s all it takes – copying the FTP and battle royale mode – then don’t give up on Activision stock! Arguably, the underlying firm has the greatest library and expertise in immersive first-person shooter games.
Technical Risks for ATVI Stock
Fundamentally, I’m confident that Activision stock will eventually find favor with Wall Street. Once the restructuring dust settles, ATVI will enjoy a leaner, meaner framework, one that focuses on productive endeavors. And recent developments show Fortnite isn’t impenetrable.
But should you jump on ATVI stock now? It seems tempting. On the one hand, a mismatch exists between the company’s fundamental strengths and its technical discount. This may be the setup that contrarians dream about.
On the other hand, I worry about the steep decline shares have suffered over a short timeframe.
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Currently, we’re witnessing a significant bump up after the Q4 results. But compared to the bearish attacks, a 3% move here or there doesn’t do jack. It also leaves Activision stock dangling dangerously in a no-support zone.
Like I said earlier, I’m optimistic about the long run. I think it’s wise to creep into ATVI at this level — and I do mean creep. The possibility that Activision shares could dip to $35 or below is a real one.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
