Activision Stock Heads into Q4 Earnings on the Defensive

The video game industry is facing a headwind none of its companies may overcome

For a short while it looked like things couldn’t get any worse for Activision Blizzard (NASDAQ:ATVI) shareholders. Indeed, after being nearly chopped in half between October’s high and December’s low, Activision stock looked as if it was finally positioning for a recovery move.

This week the rug got pulled out from underneath that budding rebound. Disappointing outlooks from rivals Electronic Arts (NASDAQ:EA) and Take-Two Interactive Software (NASDAQ:TTWO) dragged Activision stock to new 52-week lows, as investors feared Activision was facing the same headwind.

The video game giant will get a chance to prop up its stock on Tuesday, when it posts its fourth quarter numbers. In fact, the market is betting on some level of bounce-back after the recent drubbing.

The longevity of any turnaround, however, remains question in the new video gaming paradigm.

Fortnite Is the Symptom, Not the Illness

It wouldn’t be hyperbole to say Fortnite, developed by Epic Games and Tencent Holdings (OTCMKTS:TCEHY), has turned the video game market on its ear.

These sort of multiplayer free-for-alls and team-combat games are anything but new. Activision Blizzard even has some in its stable, like its Call of Duty franchise. Electronic Arts has a handful of such games as well. Fortnite was different though, in that it was the first free-to-play game of its ilk that took a measurable toll on the titan publishers in the business.

As much as Fortnite is a finite threat to the video game industry’s powerhouse names though, it’s also representative of a much bigger, more philosophical threat. Namely, it underscores the growing reality that great games can be distributed online, and that anyone can make a great video game using widely-available development tools that were once reserved for the industry’s elite.

And yet, while Fortnite represents a growing challenge to the gaming business’ most familiar names, it too is threatened by an even more significant force: waning interest in video gaming altogether.

London-based researcher Pelham Smithers recently noted, “The various bits of the jigsaw puzzle just don’t add up, so we’re looking for the market to shrink in 2019. The sell-off in video game stocks is primarily down to a growing realization of the risk that this view is right.”

With that backdrop, even an earnings beat from Activision Blizzard on Tuesday may not be able to drive a sustained recovery effort for ATVI stock.

Activision Blizzard Earnings Outlook

Still, a beat could at least supply some short-term relief and buy some time for the company to regroup.

As of the latest look, analysts are calling for fourth quarter revenue of $3.04 billion and earnings of $1.29 per share of Activision stock.

Both are well up from year-ago comparables of $2.64 billion and 94 cents, respectively, largely thanks to smashing success with its Call of Duty: Black Ops 4. Its release on October 14th led to the company’s best-ever single day of digital sales, and the game continued to sell well through the holiday season.

It may not be enough though.

Oppenheimer analyst Andrew Uerkwitz recently downgraded ATVI stock on concerns of a deterioration of its Overwatch franchise – a major eSports title – and concerns that its Call of Duty line is in jeopardy now that “competitors are addressing a younger and more social audience with effective [microtransactions] and frequent content updates.”

Looking Ahead for Activision Stock

While Tuesday’s fourth quarter numbers will certainly be telling, most investors have already taken a step back in an effort to gauge what 2019 will likely look like. And, they’re not all worried.

Morgan Stanley’s Brian Nowak is one of those optimists. He notes Activision Blizzard has three potential catalysts in the queue: Its next Diablo game, a compelling presence at this year’s Electronic Entertainment Expo and BlizzCon, which is the company’s annual convention aimed at touting its latest developments.

Scheduled for early November, that should be enough time for the company to come up with some answers to its recent challenges. It won’t be enough time to develop a new game, however.

Despite Nowak’s optimism, most observers are also doubters, and will be looking for convincing proof that the company can at least meet 2019’s revenue estimates of $7.35 billion and earnings estimates of $2.61 per share of ATVI stock.

Anything short of that could prove problematic, even if shares are oversold and ready to bounce. Plunges from EA and TTWO stock have already set a bearish tone.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


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