It’s been a rough ride for shares of Activision (NASDAQ:ATVI) over the past few quarters. Once a high flyer riding strong on eSports and micro-transaction tailwinds which were propping up the whole video game industry, Activision stock has tumbled more than 40% over the past several months amid slowing growth trends and escalating competitive headwinds.
That ride didn’t get any easier in early May, when Activision delivered a weak second quarter guide which implied that the current slowdown isn’t going away anytime soon. Investors were disappointed. ATVI stock dropped another 5% in response.
Ostensibly, ATVI looks like a tough buy right now. There’s a huge pivot in the video game world from console to desktop, and from paid first person shooters (FPS), to free-to-play battle royale games. This pivot creates a headwind for Activision, since the company makes a killing on console-focused, paid FPS games. Also, Activision really isn’t doing much by the way of building out its content portfolio, and the company may also be maxed out on the micro-transaction front.
All in all, there’s a lot of reasons not to buy Activision stock right now.
But, all those reasons are short-term in nature. In the medium to long term, current headwinds will fade away, and be replaced by more robust secular tailwinds. When that happens, the really beaten up Activision stock will soar.
Net net, the smart thing to do with ATVI stock is buy on this dip, and wait. The turnaround may not happen today. Or tomorrow. But, it’s coming, and when it does arrive, this stock will fly high again.
Short Term Problems Are Big
Activision’s numbers haven’t been good for the past several quarters, and growth has been consistently slowing, mostly because the company is staring at a plethora of short term headwinds that are impacting growth.
First, consumption in the video game industry is changing. Before, all the hype was around console-focused, paid FPS games, of which Activision is the king with its beloved Call of Duty series. Now, the hype has shifted, and its around desktop-focused, free-to-play battle royale games like Fortnite. This shift has negatively impacted engagement in the Activision ecosystem.
Second, there has been a serious lull in game production at Activision. As this Forbes article points out, Activision’s pace of new content production has been largely unimpressive and slow over the past several years. Thus, new game catalysts aren’t offsetting the battle royale consumption shift.
Third, the micro-transaction tailwind which pushed huge digital revenue growth over the past several years is starting to wear out. Micro-transactions came under a lot of heat in 2017 and 2018 after gamers complained about paying too much for in-game content. They have since shifted to free-to-play games. In order to win those gamers back, Activision will likely have to ease up on micro-transactions.
Broadly, then, short term headwinds related to an adverse consumption shift, a content production lull, and a big tailwind drying up are to blame for the recent weakness in Activision stock.
Long Term Solutions Are Coming
The aforementioned headwinds weighing on ATVI stock are ephemeral in nature. Eventually, they will subside, and be replaced by more permanent and longer-running tailwinds. When that happens, Activision stock will bounce back in a big way.
Sure, video game consumption is shifting. But, do you really think Activision won’t shift, too? Electronic Arts (NASDAQ:EA) made the big shift with Apex Legends. Activision will likely follow suit. Alternatively, gamers could shift back to FPS games. Either way, thanks to its largely unparalleled resources, reach, and content, it’s only a matter of time before this video game consumption shift headwind turns into a tailwind.
Also, Activision is in a lull in terms of content production. But, such lulls are nothing new. They’ve happened before. Each time, they end with a content production boom, which provides a multi-year tailwind for the business. The same should happen this time around, because Activision has such a long and robust track record of video game content production. As such, history says that today’s near term production lull headwinds will eventually turn into production boom tailwinds.
Lastly, the micro-transaction tailwind may be on its last legs. But, the eSports tailwind is in the first inning of its growth narrative. Over the next several years, the popularity of eSports will boom.
More leagues will be created. More teams will be spawned. Viewership will rise. Revenues in the industry will explode higher Activision will be at the center of all of it, because the company has a powerful content line-up which lends itself ideally to eSports leagues.
Bottom Line on Activision Stock
When it comes to ATVI stock, near term problems are creating a long term opportunity for investors. The market is acting like the headwinds impacting Activision today are going to last forever. History, trends, and fundamentals say they won’t. Eventually, they will be replaced by tailwinds.
Because Activision stock currently trades at a multi-year low valuation, current headwinds are priced in, and future tailwinds are not. Thus, the best thing you can do here is buy ATVI stock, and wait. Wait for the tailwinds to kick in, and spark a big rally in ATVI stock.
As of this writing, Luke Lango was long ATVI and EA.