Activision Blizzard (NASDAQ:ATVI) is one of the most important video-game makers, as it owns some of the biggest game franchises. Although Activision stock hasn’t had a good run recently, that quickly could change.
ATVI is expected to report its quarterly earnings on Aug. 8.
I would not bet against the future of ATVI stock; but, in the short-term, I am not very optimistic on Activision Blizzard’s strategy and pipeline, especially given the industry’s latest developments. Therefore, between now and Aug. 8, I expect to see Activision stock exhibit further volatility and, possibly, price weakness.
The State of the Gaming Industry
The success of mobile gaming, which accounts for half of all gaming revenue, is one of the most important drivers behind the growth of the industry.
Although the video-game market has been growing rapidly in recent years, 2019 has not been a good year for the industry so far. Analysts have cited multiple headwinds, including the fact that China is now enforcing strict regulations on games, and the huge popularity of free-to-play games.
For example, Fortnite, an apocalyptic survival video game developed and marketed by the privately held Epic Games, generated $2.4 billion of revenue last year, more than any other single game in 2018. The free-to-play game has become a worldwide favorite of gamers of all ages and has taken the wind out of other established studios’ sales.
But industries that are growing quickly, including the video-game sector, inevitably attract a great deal of competition. The owners of Activision Blizzard stock are not exactly sure how it can succeed against these competitors and which new game titles the company will use to increase its revenue.
Activision Blizzard is currently reliant on its video-game franchises, and unless ATVI’s business model adapts to the dynamic shifts in the industry, its revenue may not grow for many quarters to come.
What to Expect from ATVI’s Q2 Results
Before Activision Blizzard reported its Q1 earnings in May, Wall Street was hoping to see the company dispel fears of Fortnite and other competition.
However, the results left some investors disappointed as the company’s monthly active users (MAUs) steadily declined during the quarter, possibly indicating that Fortnite has been luring more users away from ATVI. Activision has also encountered meaningful competition from Apex Legends, another free-to-play game launched by Electronic Arts in February.
During the quarter, ATVI’s MAUs hit their lowest level since Q1 of 2016. Therefore, when ATVI releases its Q2 earnings report, investors will likely carefully analyze this metric.
Even though ATVI’s Q1 results beat analysts’ average expectations, its revenues fell year-over-year. The company’s Call of Duty: Black Ops 4 game has done well; however, its Destiny franchise has been underperforming.
Finally, Activision Blizzard’s guidance for the rest of the year was also less than impressive. It expects its 2019 revenue to be $6.025 billion, down from $7.5 billion in 2018.
Analyst Worries and Activision Stock
Analysts have also been concerned about the impact of the departures of several high-ranking Activision executives. Meanwhile, Activision Blizzard is continuing to bet big on eSports, and investors are hoping that the company’s growing eSports fan base will enable it to boost its results, raising ATVI stock.
Going forward, analysts believe eSports will become a major disruptive force, with a market that will exceed $1 billion this year and a 26.7% year-over-year revenue surge. However, eSports haven’t moved the needle for Activision stock yet.
In May, the company highlighted that, on average, players were spending about 50 minutes a day on ATVI’s games. Analysts are likely to pay attention to any major changes in this number.
Most investors are likely to wait on the sidelines until they have had a chance to analyze the company’s updated balance sheet on Aug. 8. Unless the company’s numbers and its 2019 guidance are exceptional, investors may decide not to invest in ATVI stock for several more weeks or months.
Where Is ATVI Stock Now?
Despite the stock market’s rally in 2019, Activision stock is little-changed this year while the stock price of Electronic Arts, one of ATVI’s main competitors, is up 11%.
ATVI’s current share price of about $47 is still under its 200-day moving average, which is about $49.
While long-term investors would like to see ATVI stock price go over the $50 level, traders are likely to keep the range between $42.50 and $47.50. Ultimately, ATVI stock price will need to stabilize and build a base again before a long-term sustained leg up can occur.
The current share price assumes that most of the bad news has already been baked into ATVI stock.
Investors who already own ATVI stock may want to hold onto their positions. However, they may consider placing a stop loss at about 3%-5% below the current price.
Experienced options buyers may also consider using a covered call strategy with Aug. 16 or Sept. 20 expiration dates. Such a hedge would offer both downside protection in case of volatility and a decline of Activision while allowing investors to benefit from any gains of ATVI stock.
After the upcoming earnings call, investors who still believe in the bull case for Activision might consider waiting for a better time to buy ATVI stock, such as when the price is around the low $40’s or even the high $30’s.
The Bottom Line on Activision Stock
With its strong franchises, Activision Blizzard is an important company that is likely to succeed despite the industry’s headwinds. The digital-gaming revolution is here to stay, and I believe the long-term fundamental outlook of ATVI stock is still upbeat.
However, it may take several more quarters before ATVI’s revenue resumes growing, enabling ATVI stock price to rebound.
Investors who are interested in companies in the interactive software or entertainment sectors but do not want to commit all their capital to a single stock such as ATVI may also consider investing in various exchange-traded funds (ETFs) that have Activision Blizzard as a holding.
Examples of such funds include the Invesco Dynamic Software ETF (NYSEARCA:PSJ), the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:ESPO) and the Communication Services Select Sector SPDR (NYSEARCA:XLC).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.