Activision Blizzard (NASDAQ:ATVI) released World of Warcraft Classic on August 26. The waiting times to play the game that first launched in 2006 were anywhere from 30 minutes to several hours. Naturally, Activision Blizzard stock jumped on the excitement, hitting $52.22 before closing August 27 trading at $51.09, up 4.9% on the day.
ATVI stock has traded in the $40s every day so far this year except on six occasions, five of them being in the $50s, two due to the WOW Classic release. In addition, ATVI shares closed once at $39.79 in mid-February.
However, for the most part, it’s been range-bound in the $40s.
The latest news has pushed its stock higher. I’d wait until it gives back some of the recent gains so you can buy in the mid-to-high $40s.
Here are three reasons why.
Activision Blizzard stock drifted to $45 in mid-August after the games maker announced strong second-quarter earnings along with weak guidance for Q3 2019.
Analyst estimates for the third quarter were 40 cents a share with revenue of $1.36 billion. The company’s guidance suggested a much gloomier picture at 20 cents a share and revenue of $1.12 billion.
A 20-cent difference in earnings and a $240 million difference in revenues is a pretty wide gap. If Activision Blizzard sees the third quarter being this miserable, no wonder, the stock fell into the mid-$40s.
For perspective, Activision’s revenue and earnings per share in Q3 2018 were $1.5 billion and 42 cents, respectively. If the outlook is on target, the company’s expecting a 34% year-over-year decline in revenue and a 52% drop in earnings.
However, let’s consider the company’s outlook for Q2 2019.
Activision expected $1.32 billion in revenue and 42 cents and 35 cents in earnings. It delivered $1.396 billion in revenue and earnings of 53 cents a share, increases of 6.2% and 51% respectively.
The company downplayed the potential of the second quarter when announcing its first quarter results in May. And now it’s done it again. I have to think the same thing is going to happen when it announces Q3 2019 results in November.
I guess we’ll see.
Esports Coming On
Activision Blizzard continues to grow its Overwatch esports venture, which is based on the company’s mega-hit game. In July, CNBC reported that each Overwatch team would host at least two weekends of competitive games in their markets, making the league very similar to a traditional sports league.
“Our plan in the beginning was always to design a structure that’s simple, easy to understand for fans and also partners in order to unlock value and new fans,” he said. “What we’re seeing is that so far, it’s working,” commented Activision Blizzard’s CEO of esports, Pete Vlastelica.
The most incredible part of Overwatch is that franchise owners are willing to fork over millions in fees to be a part of the surge in esports. Toronto, where I’m originally from, apparently paid $35 million for its expansion team. That’s for a competition with no ice required.
While it’s early days in esports, Activision is clearly interested in being one of the industry’s top dogs. It will be interesting to see how this plays out.
New Consoles in the Pipeline
My InvestorPlace colleague, Luke Lango, recently recommended that investors be patient with Activision Blizzard stock, suggesting that buy-and-hold investors will be rewarded. I couldn’t agree more.
Luke correctly points to the fact that both Xbox and Playstation will be bringing out next-generation player consoles after several years without any new hardware for gamers. That will increase the demand for video games, putting some zip in ATVI’s sales.
Of course, the same holds for its peers, but being one of the industry leaders, Activision will benefit proportionally.
Bottom Line on Activision Blizzard Stock
In March, I suggested that the layoffs the company initiated in February, combined with a 20% increase in spending on its core and incubation development teams, would bode well for Activision Blizzard Stock down the road.
As I look at its second quarter performance, it appears as though the changes made by CEO Bobby Kotick are starting to have a positive effect on business. That’s not to say that it’s entirely out of the woods, but I do feel its guidance is a little conservative.
If ATVI stock drops into the mid-$40s, I’d be buying by the boatload.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.