Sometimes, I find that other people have already expressed what I’m trying to find the words to say. Because quite honestly, the complete meltdown in Activision Blizzard (NASDAQ:ATVI) is just baffling. Despite its core strengths in the popular first-person shooter (FPS) genre, ATVI stock lost over 26% last year.
Fortunately, fellow InvestorPlace contributor Dana Blankenhorn knows exactly how I’m feeling. He likened Activision stock to Humphrey Bogart’s The Harder They Fall. As Blankenhorn explains, the movie portrays a boxer who is set up to fail by his promoters. I can certainly see the analogy. He wrote:
Unfortunately, like the fighter in the Bogart movie, the company had a glass jaw. It had no presence in a key segment of the fast-growing online game market, and Fortnite, created by privately-held Epic Games (in which Tencent Holdings (OTCMKTS:TCEHY) has a 40% stake) quickly knocked it out.
I especially commiserate with my esteemed colleague because, like him, I also praised ATVI stock. Indeed, I went to bat for it more times than I care to admit. But beyond my personal misgivings, other factors cast a dark cloud on the famous game developer.
Despite some positive takeaways off its fourth-quarter fiscal 2018 earnings report, Activision came up short in the content department. As Blankenhorn noted, the company had “just one of the ten best-selling games in 2018.”
That’s a shocker because, as I mentioned earlier, ATVI stock is essentially a direct investment into FPS. Of course, the underlying company is perhaps best known for its Call of Duty series. For the most part, a new addition to the franchise is guaranteed money.
Unfortunately, the tables turned last year due to Fortnite. If Activision can’t respond effectively, Activision stock looks incredibly risky.
Light at the End of the Tunnel for ATVI stock
Both Blankenhorn and I agree that the game-maker has serious challenges ahead. Where we split is in our forecasts. He wrote: “With few winners in hand and none in sight, Activision stock is a game I don’t want to play.”
I respect his argument because let’s face it: no one wants to get burned again from the same company. At the same time, I don’t want to miss out on a potential comeback opportunity. This is especially pertinent since Activision’s biggest headwind may fade into the background.
One of the reasons why Fortnite devastated the video-game stalwarts like ATVI stock or Electronic Arts (NASDAQ:EA) is what I would term the “blitzkrieg effect.” Basically, Epic Games released a viral hit that catapulted into a cultural phenomenon. No one anticipated such profound success, which invariably disrupted the gaming ecosystem.
Not only that, Fortnite demonstrated the free-to-play (FTP) business model’s viability. Rather than generating sales through downloads, the game itself is free. But to really enjoy it, players must make in-game purchases. Many gladly did so.
But recent statistics suggest that Fortnite is losing its charm. For example, between January and June of last year, the number of Fortnite players jumped from 45 million to 125 million, or a 178% increase. But by November, while the game saw 200 million players, player growth slipped to 60%.
I’m confident that growth trajectory will narrow further. As I recently reported, Electronic Arts introduced its own FTP game called Apex Legends. By all measures, Apex is a massive success, reaching 10 million players in record-breaking fashion.
Therefore, Activision stock has two tailwinds. First, Fortnite’s meteoric growth is noticeably softening. Second, rival EA proved that you can fight fire with fire, pitting one FTP game against another.
The Bottom Line on Activision Stock
Back in my high school football days, I had my own Humphrey Bogart moment. Playing cornerback, I dove to tackle the opposing ballcarrier. Unfortunately, my teammate, playing linebacker, also had the same idea.
I have zero recollection of the time my body went from one direction to the opposite. When I came to, I distinctly remember looking up at the sky, and at my teammates’ faces. It took a while to get my bearings, but I eventually finished the game.
Ultimately, I think this is the better analogy for ATVI stock. Sometimes, a hard right hook just knocks you into the next time zone. It’s a scary moment for both stakeholders and the management team.
But now, the question is whether Activision stock has what it takes to recover. Based on its new rival Epic losing steam, I like ATVI’s chances here. EA has charted a blueprint to attack Epic. Given Activision’s expertise in creating compelling content, investors can buy the discount with some measure of confidence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.