ATVI Earnings Probably Won’t Impress, But Expect Improvements Longer Term

Activision is not expected to impress investors when it reports first-quarter results. Beyond that, what are its prospects like?

Activision Blizzard (NASDAQ:ATVI) stock might experience more volatility in its share price after it reports earnings. ATVI reports first-quarter results on May 2 after the market closes. With monthly video came sales numbers all over the place,  investors will have a tough time forecasting Activision’s results.

Activision stock
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In March, NPD reported an 11% drop in total video game sales — for all companies. Video game hardware sales fell 15% while PC and video game software sales fell 11%. For 2019, video game sales fell 2% to $3.152 billion. These figures suggest that Activision will not report a good quarter. And ATVI stock’s trading action shows it.

Shareholders are still undecided with the company’s prospects for the rest of the year. ATVI stock’s trailing P/E is around 20, which is still high even after the stock lost over 40% of its value from 52-week highs.

Not Enough Hit Games

In March, Activision only had two game titles on the top sellers list. Sekiro: Shadows Die Twice came in second place while Call of Duty: Black Ops IV came in weak on the 10th place slot. Electronic Arts (NASDAQ: EA) also had two titles on the list. Take 2 Interactive Software (NASDAQ: TTWO) had Red Dead Redemption II, NBA 2K19, and Grand Theft Auto V.

CoD is usually a big money maker for Activision, so the game’s placement is a disappointment. Conversely, with Sekiro on the number two slot, Activision still has a chance to beat estimates in the upcoming earnings report.

What to Look for In ATVI Earnings

Although it is unlikely, Activision management could raise its outlook for the year if it expects CoD sales to improve. Continued strong momentum in sales of Sekiro would also give 2019’s result a lift.

But Activision’s overall revenue momentum hinges on two things: unit sales and in-game up-selling. Gamers are becoming increasingly wary of paying the high upfront retail price for game titles like CoD. And when the refresh is hardly different from past releases, gamers get bored. Compounding these problems is the unwillingness to spend on in-game items. This could pose a problem at BlizzCon. Game titles like Warcraft, StarCraft, Diablo, Hearthstone, Heroes of the Storm and Overwatch might not make as much in in-game sales as management wants.

Activision’s 755 layoffs — or 8% of staff 00 in the fourth quarter will lead to lower costs and better profit margins. The immediate savings could have long-term negative implications, however. Growing competition from freemium games could still pose a threat to Activision’s business model. If game development slows over time from the loss of staff, the gaming quality could also worsen, accelerating a slowdown in game sales over the long-term.

ATVI Valuation

Activision is debt-free and increased profits over the last decade. The recent bumps are a setback for the company but could represent a buying opportunity for investors. CoD sales are modest in 2019 but were strong in 2018. To top it off, the Destiny sale skews this year’s weaker numbers. But by shedding weak titles and investing in strong ones, the company may potentially report better results in due time.

Your Takeaway

For now, Wall Street analysts are still bullish on Activision’s prospects. 23 analysts covering ATVI stock have a $52.63 price target, according to Tipranks. Conversely, investors could choose from any number of Discounted Cash Flow models to calculate a fair value on the stock. Per, the stock could be fairly valued in the $30 – $50 range.

Activision is still a compelling investment idea. The upcoming quarterly results will allow investors to evaluate the benefits of recent cost-cuts. And the outlook could change for the better if game sales improve better than thought.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

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